Camping World Holdings, Inc. Q3 FY2023 Earnings Call

Good morning, and welcome to Camping World Holdings Conference Call to discuss Financial Results for the Third Quarter of Fiscal Year 2023. 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 that the reproduction of the call in whole or in part is not permitted without a written authorization from the company. Joining on the call today are Marcus Lemonis, Chairman and Chief Executive Officer; Brent Moody, President; Karin Bell, Chief Financial Officer; Matthew Wagner, Chief Operating Officer; Lindsey Christen, Chief Administrative and Legal Officer; Tom Curran, Chief Accounting Officer; Will Colling, Executive Vice President, Good Sam; and Brett Andress, Senior Vice President, Investor Relations. I will turn the call over to Ms. Christen to get us started.

Thank you, and good morning, everyone. A press release covering the company's third quarter 2023 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 our business plans and goals, industry and customer trends, inventory expectations, the expected impact of inflation, interest rates and market conditions, acquisition pipeline and plan, future dividend payments, and capital allocation, and anticipated financial performance. Actual results may differ materially from those indicated by these remarks as a result of various important factors, including those discussed in the Risk Factor section in our Form 10-K, our Form 10-Q, 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 2023 third quarter results are made against the 2022 third quarter results unless otherwise noted. I'll now turn the call over to Marcus.

Good morning and thanks for joining us for Camping World's 2023 third quarter earnings call. I'm joined in the room today by members of our senior management team. But participating on today's call is Matthew Wagner, Camping World's Chief Operating Officer; and Lindsey Christen, Camping World's Chief Administrative Officer. The last 48 months was the fastest and most profitable growth period our company had ever experienced. During that period, we generated over $2.4 billion of adjusted EBITDA. While we recognize the cyclicality of our business, we also stand strong in recognizing how the business performs consistently over time. Early last year, we boldly forecasted the industry slowdown we saw coming. We immediately canceled over $900 million of new RV orders and further accelerated our shift towards the used business to help bolster revenue and gross profit. To start this year out, our company had over 16,000 model year 2022 in stock. Today, we have less than 100. Today, we're also sitting with less than 11,700 new model year '23s, and we're on track to be around 9,000 by the end of December, a significant improvement year-over-year. With the new model year 2024 quickly arriving, the cost of those units in our core segments is coming in more than 12% less, and we must remain steadfast in this model year elimination strategy. The execution of rigorous inventory management, however, comes at a short-term cost: higher wages to maintain the stability of our top performers, higher digital marketing costs to generate activity, and compressed front-end margins. This management-mandated strategy will likely result in fourth quarter, historically, our industry's toughest quarter with an EBITDA in the neighborhood of breakeven to slightly negative. Our investment in that, our team feels is absolutely necessary. We believe this prudent approach to managing our inventory sets us up for market share and earnings growth in 2024. As a management team, we are adamant that this strategy will set us up for the next 48 months. We want to materially outpace our competitors and gain market share. We want to build strong alliances with manufacturers around the proper inventory levels and forecasting for them and us. We want to maximize the return of working capital to continue our supercharged acquisition plan. We want to increase the velocity of our turns in this higher floor plan interest environment. And lastly, we want to continue to build our active buyer file to bolster Good Sam's unprecedented growth. Speaking of Good Sam, our high-margin recurring revenue business, it set records in many categories. It will be the first time in its company's history that it exceeds $100 million in contribution to the overall business, driven by our roadside assistance product, extended warranties, and vehicle insurance. Our leader, Will Colling, has done an outstanding job over the last three years of streamlining the operation, launching the company's first loyalty program, and renegotiating agreements with partners. We feel strongly that the Good Sam products and programs are both undervalued and underappreciated for their contribution and consistency to our company. When I think about our company's greatest achievements, I land on one in particular: the tenure and strength of our team. In order for our company to achieve the growth I expect, we must continue to build, train, and promote our leaders. Going forward, you will be hearing from more of them, new and innovative ideas, fresh perspectives, and a bench that is built for several decades. Truth be told, it's the most exciting part of my assignment here. Most of you know Matthew Wagner, our Chief Operating Officer. For a little color before I hand the call over to Matt, he has been with our company since 2007, began as an intern, and over the last five years in particular, has been one of the most instrumental members of our team, and I could not be more proud to turn the call over to him to cover the financial results as well as his perspective on the future of the business.

Thank you, Marcus. Within the quarter, we sold over 32,300 units, an increase year-over-year, including 17,000 used units, a record for the third quarter. Our sales team absolutely crushed it. The used business continues to thrive. While we are focused on growing our market share of the used business by adjusting our procurement and remarketing efforts, we believe we are positioning ourselves to substantially grow our market share of new units in 2024. As a reminder, we pivoted hard into the used business a couple of years back. This was a direct response to the significant price increases of new model year '22 and '23 units. During that time, we informed our manufacturing partners that RV consumer demand is highly influenced by price changes, both up and down. Over the last few months, we have worked extensively with our key manufacturing partners such as Thor, Forest River, and Winnebago to identify segments and price points that will yield a greater volume of new RV sales while maintaining healthy margins. Three months ago, we informed the market that we started to see an improvement in the year-over-year trend line of same-store sales. At that time, we saw the affordability curve beginning to bend. As we push that curve further into the quarter, we established greater evidence of the favorable impact of these price modifications. Throughout the fourth quarter, we will be focused on lending our inventory, refining our used procurement, and setting the stage to grow our overall market share in 2024. Our performance for the third quarter is as follows: we recorded record revenue of $1.7 billion, a 7% decline from last year, driven primarily by lower new unit volume and more importantly, lower ASPs. Good Sam, which we believe is our most stable and predictable business unit, posted record revenue and growth for the third quarter with $50 million in revenue and $40 million of gross profit. A portion of that improved gross profit resulted from the successful negotiations with vendors of our roadside assistance business. Total adjusted EBITDA for the quarter was $95 million. While we experienced compressed margins on vehicle sales for the quarter, we were able to offset some of that gross profit through the recognition of additional finance income through improved performance on finance product cancellations. We ended the quarter with roughly $260 million of cash, broken up by $207 million of cash in the floor plan offset and additionally, $53 million of cash on our balance sheet. We also have about $388 million of used inventory net of flooring and $203 million of parts inventory. Finally, we own about $160 million of real estate without an associated mortgage. I'd like to turn the call over to Lindsey Christen, our Chief Administrative Officer. Lindsay has been with our company since 2008 and started on the legal team under our President, Brent Moody. Today, Lindsey oversees our entire human capital efforts, our training organization, real estate group, our M&A process, and our legal department.

Thanks, Matt. We've been adamant over the last 15 months that we would be thoughtful and forward-looking when reviewing SG&A options that impact our workforce. We're planning for leaner operations at our manufacturer-exclusive locations as well as at a number of our planned acquisitions, which have smaller footprints. We also believe we can run our existing stores more profitably in the current economic climate with a realistic view of the impact of gross profit reduction. As a result, we made the difficult decision at the end of the third quarter to reduce headcount by over 1,000 people, around 7% of our workforce and rightsized variable pay plans, resulting in about $60 million in annual SG&A savings. We will continue to balance investments in our workforce and growth. We have and will continue to invest in our employee experience and growth. We have and will continue to invest in our employee experience and aim for best-in-class training, wages, and benefits. We have and will continue to close locations that haven't performed as expected. During the third quarter, we closed two retail locations and a distribution center. We also identified up to seven locations that were underperforming and will be closed in the fourth quarter. We have a corresponding plan to eliminate the real estate obligations for these closed locations through sales, sublease or lease terminations. We've also been on a robust acquisition path. Over the past year, we've added 16 locations and continue to add to our pipeline, including a 12-store chain we announced last week. While some deals fall out of our pipeline during the diligence process, the overall influx of potential deals remains very active. All in, we hope to end the 2024 calendar year with no less than 220-plus locations.

The willingness to take decisive action and mobilize quickly to execute is what makes our management team and our company unique, nimble, decisive, and effective. With the last 48 months having generated over $2.4 billion in adjusted EBITDA, we are up for the challenge for the next 48. It is our expectation that in 2024, total company revenue and same-store unit sales will be positive and that Good Sam will continue to improve top line. Additionally, we expect overall company gross margins to be flat to slightly positive. With our disciplined approach to managing inventory, reductions in expenses, and elimination of underperforming assets, it is our expectation to improve our SG&A as a percentage of gross by no less than 2%. These items, coupled with our store count growth could result in an earnings increase in excess of 30% in 2024. I'll now turn the call over to the operator to lead Q&A.

Thank you. We will now be conducting a question-and-answer session. The first question we have is from Joe Altobello of Raymond James. Please go ahead.

Thanks. Hey, guys, good morning. So Marcus, you mentioned price elasticity earlier. How are you thinking about pricing over the next few quarters? As you're well aware, the indication from manufacturers is that towable pricing on modular '24s could be down mid to high singles and maybe even low doubles. Is that how you see that? Or do you think we need to see a steeper decline in order to drive demand growth in '24?

Morning, Joe. This is Matt Wagner. I'll field that one, if you don't mind. Great question. It's been a topic that we've heavily discussed on these calls as well as at a number post our earnings call. To walk through our general mindset related to price elasticity within this marketplace. We've been proactive as a management team, monitoring every price modification we're making and the resulting demand impact, where you could look at our used margins even this past quarter and recognize that we did face some compressed margins; however, we recognized a positive same-store sales. Conversely, on the new side, while we were down, we continue to see that same-store trend line continue to improve. That same-store trend line is really a byproduct of that second derivative, that change of rate of the change of rate. Where we saw our new same-store sales continue to improve as we started to toggle the prices beginning in July, which is when we first started to speak to the group when we had our earnings call in August about the results we were seeing in July, and that continued to transition through August, September, October. So really, Joe, we've been working steadfastly with the manufacturing partners to ensure that we're starting to target these right price points, and it's going to vary based upon the segment. I can tell you that in certain entry-level price points, especially travel trailers, we're seeing some price concessions to the tune of 15-plus percent in some cases. In other cases, we're currently just seeing high single digits, give or take. We're being as particular as we can to target those certain segments where we know it's going to yield an improvement in demand as we head into next year. And that's really where we're continuing to place our focus on driving ASP down.

Yes. Joe, what's interesting about it is that we have always been consistent that the lower the price is on our in-stock units, a wider the funnel is to the addressable market. We know that every single $1,000 that we drive down ASP, the funnel of available buyers equally gets wider. As we look to gain market share, turn our inventory faster because Tom and Karin require us to, and then realize that we can address some of the other issues affecting consumers like higher rates or whatever it may be, but that's really our path to success. We do not believe that demand for this lifestyle and customers' enthusiasm from staying in the lifestyle has changed at all. When we look at interest rates and we look at rising costs that have existed over the last 24 months on units, they are the suppressors themselves. We want to unlock that as quickly as we can; Matt and his team have been instrumental in understanding that working with these manufacturers, lower-priced units means more volume. In order for us to get there, we have a little bit of work to do in the next 3, 4, or 5 months to ensure that going from $43,000 as an average ASP in the last couple of months, we need to get down to like $38,000 or $39,000. We are driving towards that target. Keep in mind that many people are not going to forecast this properly. When you drive down ASPs, you will ratchet up volume, but you will have less revenue. That's okay for us. We're looking for transaction counts because transaction counts lead to more service, more F&I, more Good Sam, more parts, etc. We want to tell everybody upfront. This is going to be an ASP wide in the funnel volume game, and that we will make up the revenue drop from declining ASPs with incremental accretive acquisitions.

Very helpful. And just one point of clarification. I think, Marcus, you mentioned that you could see earnings growth north of 30% next year. Are you thinking EBITDA or are you thinking EPS, just to be clear.

I'm going to go ahead and not try to get pinned down on anything specifically. I'm thinking adjusted EBITDA. Obviously, if adjusted EBITDA is growing, so are all the other numbers. With our A and B shares, it gets a little wonky around how we look at EPS. A simple answer is we expect growth in all of it. We said no less than 30%.

The next question we have is from Tristan Thomas-Martin of BMO. Please go ahead.

Hey, good morning. Just right off the back. Can we talk about your expectations for stock calendar '24, I think last quarter, you said 370 to 400 industry shipments. Is that still the case?

Are you asking about just wholesale or wholesale matching with retail because we think there's a very interesting dynamic there that needs to be told.

Honestly, whatever story you want to tell, I'd like to hear however you're looking at.

Good morning. Tristan, this is Matt again. You are correct. Last quarter, we did speak with - I think Alex had asked that question, and we were suggesting that retail could end up anywhere in that 370 to 400 range in particular. I would maintain that, that still holds true on the wholesale side. I think that wholesale could honestly end up anywhere from 370 to 400. There's been such a rapid destocking on dealers' lots, or I believe the manufacturers are very well-positioned to actually yield the opportunity to replenish the loss of dealers in certain segments and price points. In terms of retail activity, however, I could see retail perhaps mirroring that 370. I do not see retail going up beyond that. I think it could be in a range, though, perhaps of like 360 to 370 over 2024, which we're taking that each moment by moment, but what we are confident of is our ability to yield more market share heading into next year. When we look at the overall market, we're seeing new end use, which I know oftentimes, these questions are just focused on the new market. Within the used space, I don't know that anyone is really reporting on the fact that our market share has grown so considerably, but we're at all-time market share levels between new and used combined. We're nearly touching 10% of the overall new and used marketplace, which we are laser-focused on growing that in combination with our efforts on used and continue to enhance the new side.

Okay. Thank you. And then just one more. You called out 9,000 model year '23 or that's your target at the end of the year versus 16,000 in '22. How does that 9,000 compare to a model year '20 or model year '21?

That's an excellent question. Obviously, model year '20 was a little irregular because we were in the middle of the COVID process. With the manufacturers shut down, the '20 and '21 exited at a much faster rate because production had been hampered so dramatically. What we're using as a benchmark for us and we clearly know we have a greater opportunity to improve it is how we started out the beginning of 2023, when we had over 16,000. It's our goal to be under 9,000 as we end the year, hopefully starting out at almost half of the aged inventory we had a year ago. The good news is that the number of '24s that will be on our lot as a percentage of the total will be materially higher than the number of '23s we started last year. That's what gives us confidence to, quite frankly, have a slightly higher overall gross margin. I think the piece that we really want to focus on is while Matt's forecasting 370 in overall wholesale shipments and retail in the same neighborhood, it is predicated on driving down those ASPs. From this, we also believe that the investment in liquidating these '23s over the next 90 or 120 days is going to pay massive dividends in '24.

If I could back up to your initial question to clarify one thing. There's kind of a false corollary of ever trying to compare the 2020 model year and the 2021 model year to 2022 and 2023 model year. As such, the manufacturers changed their cadence of model year switches in 2021. They used to change the model year in April and May. When they introduced the model year 2022, they actually had introduced that in July. Ergo, you missed a solid three months of selling season. This is kind of a totally new set of norms that we're establishing where we feel really good, given that we really just have two model years to compare with the progress that we continue to make on this front.

The next question we have is from Noah Zatzkin of KeyBanc Capital Markets. Please go ahead.

Hi. Thanks for taking my question. Just maybe one for me. And you mentioned expecting gross margins to be flat to slightly positive next year. So in terms of vehicles, particularly given ASPs coming down, if you could provide some color on your thoughts around vehicle gross margins and kind of how that dynamic will impact your ability to kind of hold margins there? Thanks.

Sure. I think moving out of those 2023s as quickly as we can is really going to help bolster our margin position on new heading into next year, where we should be able to maintain somewhere in the neighborhood of where we have historically on those new margins. I think we feel very strongly about that. On the used side, I went to Matt in the quarter, and we were going through aging. We were looking at some of the stuff that was sitting on the lot for one reason or another. We said, we'd look at each other, and I said, look, we have to get the...

It's actually not how it happened. You went to Matt and said, you better clean up your inventory.

So many words. Yeah. So that said, while we do see some of that margin compression on the new side, and we may see some of that in the short term, we are confident in our ability to start procuring at these new price points as we kind of work through updated to our valuation tools and our used procurement policies heading into 2024.

Very helpful. Maybe just one more. I think you mentioned a 7% headcount reduction at the end of Q3. Did I hear you right that this should be viewed as a $60 million kind of annualized SG&A benefit?

Yeah. This is Lindsey Christen. We are looking at that savings to be combined with total headcount reductions as well as some modifications we made to variable compensation plans. It was a difficult decision, but the right thing to do for the overall health of the business.

The next question we have is from Brandon Rolle of D.A. Davidson. Please go ahead.

Good morning. Thank you for taking my questions. Just first, on used inventory, what percentage of your used inventory still needs to be adjusted to the new– the new versus used pricing spread that you guys are looking to achieve?

I think the way that I'm thinking about it, and Karin and Tom have been instrumental in providing the roadmap is that they are not satisfied with where our terms are. We've historically been in that 4 range. When we made the decision to go for it to grow that overall business, they dropped down below 3.5, which Karin and Tom said; look, I'm comfortable with 3.5, 3.75, but I want to see a quarter turn improvement. We probably have about 700 to 800 units that we need to flush out of the system. In a lot of cases, it's not about the fact that we own them wrong. It's about the fact that the accounting team wants the cash brought back into the system and allow that cash to be redeployed in the first quarter by bringing in those units from consumers at a lower cost.

They're looking for a quick 60, 90-day swap. As we add more stores, I would expect that our overall used inventory will get back up to the same total number, but on a same-store basis, we'll have brought that down by probably 6% or 7% to get that turn back up to where they really want it, which is north of 3.5. Idealistically, yes, but we're also in such an environment where we're going to just follow the money trail. We understand that we can get a better yield on some of these used segments compared to some new segments, depending upon what's happening in the new marketplace.

The beauty of that is that it's like the 'white space' will go on indefinitely. For us, it is part of our acquisition strategy because when you're adding just on the labor side alone, 70% plus margins without a lot of inventory involved, I mean, those are really attractive margins, which is why our company has historically overall company gross margins in the 30%-plus neighborhood. You take Good Sam; you take the service business like that's our differentiator.

Got it. Thank you for that color. And just, I guess, another quick one. You've talked about sort of your full year calendar year wholesale and retail expectations for the industry. I guess, what sort of cadence are you expecting for the year? Is there a point where you expect each to inflect positively? And is that demand improving gradually? Or is that just maybe comps get easier at one point in time?

Yes, Sean, that's a tough question. I mean, because you're talking about two separate subsets of information and the cube of wholesale is, of course, going to have some sort of impact based upon retail activity. Ultimately, I think the manufacturers are going to have to weigh in on that based upon their production schedules heading into next year, where it seems to me that many of them are building pretty healthy backlogs based upon what we're receiving from them at this moment. From a retail perspective, I can see new perhaps for the industry starting to continue to slow down through the end of Q1, probably even bleeding a little bit into Q2 before it starts to take off again in the back half of next year.

But the gaps are still better. They're still on a year-over-year basis, they're still better. It's slowing down in the sense that it's a seasonal piece. But when we look at the gaps, right, the same-store performance on new, for example, in the month of September or the month of October.

In September, we were nearly - well, we showed the best improvement we have in September as we have in 16 months actually. It's the best same-store new comp that we've seen in 16 months. Where I feel good about our trend line, I can't necessarily speak to the broader industry.

We know that's largely being driven by our identification of where the pricing needs to be to generate that activity. That's what has given us the confidence as we went into Q3, almost looking at it in the petri dish and said, if we stratify pricing and move certain segments down, can we generate more leads and convert more sales. That's what's given us the confidence as a management team to be as aggressive as we were in the back half of Q3, in the full quarter of Q4, and in the early part of Q1 to bring in that 2024 inventory that's lower, knowing that we're going to beat every other company to the punch. That's the key for us.

The next question we have is from Bret Jordan of Jefferies. Please go ahead.

This is Patrick Buckley on for Brett. Thanks for taking our questions. On the F&I side, how are you guys thinking about new normal GPUs heading into 2024? Is that just structurally higher compared to pre-COVID or should we expect lower ASPs and a tougher consumer backdrop to start to weigh on things there?

We typically don't look at F&I as a company on a GPU basis. We really try to look at it as a percentage of our new and used revenue. Over time, I think you've seen that kind of historical average hovering around the 12% mark.

11% to 12%. I think that's a good target that we always try to hit looking forward. Yes. I mean, one of the things that's for sure, putting a little pressure on that is the current rate environment. We have not had a hard time creating the interest and the demand for the product. But if you listen to our thousands of salespeople and sales managers, the folks that are on the front lines, they will say to you, it's a lot harder to convert somebody from excited about RVs to signing that piece of paper. Interest rates have definitely caused people to take a little bit more time to make that decision. What hasn't really been affected terribly by that is our ability for our finance team in the field through our Good Sam business centers to convert and sell other products and services. Our penetration of the Good Sam warranty and roadside assistance hasn't been affected much. We started to see some banks even lower their rates for consumers. We're not naive to the challenge that's out there, which is just more for consumers to look at concerning the higher rate than they did three years ago. We are planning on being a little longer than that.

Great. That's helpful. Thank you. And then could you talk a bit more about how demand in capacity has trended on the parts and service side? Where does Bay expansion rank within your M&A strategy? How is technician availability trending as of late?

Bay expansion is one of the key pillars in making our acquisition decisions. If we find a dealer that sells a lot of product but doesn't have service, we tend not to want to buy that business. We're sitting today with 2,800 bays, up from recent reports, and we're sitting around 2,300 technicians. We continue to invest millions of dollars into multiple training universities for technicians on our own dime within our own company, as the industry wasn't doing it at the pace we wanted. We have to continue to attract skilled labor in this country for this lifestyle to continue to bolster. The beauty of that is that it's like the white space will go on in perpetuity. For us, that is part of our acquisition strategy because when you're adding just on the labor side alone, there are 70% plus margins without a lot of inventory involved. These are attractive margins, which is why historically our company has been in the 30%-plus range.

Got it. Really helpful. Thanks, guys.

There are no further questions at this time. I would like to turn the floor back over to Marcus Lemonis for closing comments. Thank you again for joining our call. We want to reiterate our outlook for '24 with positive revenue, positive same-store unit sales, and improvement in our overall gross profit and improvement in our SG&A as a percentage. Lastly, a better return on investment for shareholders with our adjusted EBITDA growing in excess of 30%. As a management team, we're committed to delivering those results. We obviously know that there are factors outside of our control that could affect those. We're going to work hard to ensure that we beat those numbers. So thanks again. We look forward to seeing you in February. This concludes today's call. Thank you for joining us. You may now disconnect your lines.