Camping World Holdings, Inc. (NYSE:CWH) Q4 2023 Earnings Call Transcript

Camping World Holdings, Inc. (NYSE:CWH) Q4 2023 Earnings Call Transcript February 22, 2024

Camping World Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Camping World Holdings Conference Call to discuss Financial Results for the Fourth Quarter and Year Ended December 31, 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 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; and Brett Andress, Senior Vice President, Investor Relations. I will turn the call over to Ms. Christen to get us started.

Lindsey Christen: Thank you, and good morning, everyone. A press release covering the company’s fourth quarter and year ended December 31, 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 fourth quarter and fiscal year results, are made against the 2022 fourth quarter and fiscal year results unless otherwise noted. I’ll now turn the call over to Marcus.

Marcus Lemonis: Good morning, and welcome to the first call of 2024. I got to be honest, I’m glad ’23 is over. On today’s call, the team will cover both the operational and financial highlights from 2023, while providing an exciting outlook for 2024 and beyond. As the state of the union for 2023, there’s really one key message that prevails. We believe our industry has seen the bottom of new RV sales and results, and are seeing positive indicators that the next several years will produce growth in revenue, unit sales, overall gross profit, and sequentially an improving bottom line for our company. We expect to deliver 30% plus EBITDA, compared to 2023. As we worked internally through the back half of last year, in an effort to raise our profitability in ’24, we identified three key factors needing to be accomplished, to achieve our 2024 earnings goals.

We needed to eliminate age model year units, renegotiate model year ’24 pricing, and subsequently adjust our use position and values, resulting from the revised new model year pricing on ’24s. The execution of this strategy puts us well ahead of our competitors and drives market share growth going forward. As we discussed on our last call, we will have completed the bulk of this by the end of Q1, with our adjustments on used driving the bulk of our current period. We elected to temporarily slow down, used acquisitions to allow for market pricing, to resolve before reinvesting our cash. While we worked through the inventory, while working through the inventory was our primary focus, we must recognize the Good Sam business, which delivered record earnings over $100 million for the first time and continues to show stability, and growth in servicing the installed base of our RVs [ph].

Fundamentally, I’ve never seen our business adjust with such precision to micro and macro-economic headwinds. Being able to achieve the profitability we experienced during this difficult period, has proven the resiliency of our company and puts a finer point on the quality and strength of the management team that have had the privilege of assembling over the last 20 years. I’d like to now turn the call over to Matthew Wagner to discuss our company’s operations.

Matthew Wagner: Thank you, Marcus. As we reflect upon 2023, I cannot be more proud of our 12,000 plus team members. In 2023, we sold nearly 57,000 used units and generated nearly $2 billion of revenue, marking an all-time record for Camping World. Total new and used unit sales volume for the year totaled 115,000 units. Good Sam had another record year with 12% growth in gross profit and generating $100 million of adjusted EBITDA for the first time in company history. We also achieved our goal of significantly improving our new unit portfolio. We started 2023 with over 16,000 multi-year ’22s in stock. Today, we’re sitting with less than 7,500 multi-year 2023s, significantly outpacing the industry, with close to 80% of our inventory mix now in 2024 models.

Our new inventory position was further enhanced by our successful negotiations in the fall of ’23 with our OEM partners to reduce invoice prices in key categories. We were so successful in lowering new invoice prices, our used RV values were impacted. In Q4, we took decisive actions to reset used values and slow down the purchases of used RV inventory while market values corrected themselves. Between September through today, we procured 50% less used inventory year-over-year. As of today, our used same-store inventory is down 13%. These short-term maneuvers will allow our used volumes, to improve over time, as appropriately valued inventory is brought back into the system. We expect our used margins to improve sequentially starting over the next 60 days, and to normalize to historical levels by Q4.

This overall inventory strategy has resulted in positive same-store new sales in December and this trend continued throughout February, increasing in the mid-single to low double-digit range. This movement and demand supports, our previously stated thesis that lower-priced RVs are a highly elastic product. In the way of capital deployment and asset management, we acquired, opened, or signed LOIs on over 30 dealership rooftops. We ended 2023 with 202 RV dealerships, or service centers. At the same time, we optimized our SG&A cost structure, we restructured our active sports business, and we consolidated, or exited distribution centers, and underperforming locations. We made a number of changes in 2023 and it made our company stronger. And we believe this sets the stage, for at least 30% EBITDA growth in 2024.

As part of our growth plan for 2024, we will continue to focus on expanding upon the tremendous progress that, we have made with Good Sam Service, our used RV business, while focusing on market share growth of new RVs and adding accretive acquisitions, to our dealer network. As we sit here today, we are currently planning to add 25 to 30 dealerships in 2024, and the pipeline to acquire additional locations, remains robust. Many of these new locations will be opened, as exclusively branded stores focused on popular RV brands like Keystone, JACO, Airstream, Forest River, Coachmen, Alliance, and Grand Design. This cadence of store openings and acquisitions reaffirms our confidence, in hitting our goal of growing our store count, to 320 stores by the end of 2028.

I’ll now turn the call over to Tom Curran, to discuss our financial results.

Tom Curran: Thanks, Matt. In 2023, we recorded revenue of $6.2 billion, a decline of roughly 10% from last year, driven primarily by new unit volume, while used vehicle revenue of $2 billion increased 5% from last year, and was a record for the company. Meanwhile, our Good Sam Services & Plans segment posted record revenue and gross profit for the year with $194 million in revenue and $134 million of gross profit. In the fourth quarter, we recorded revenue of $1.1 billion, down 13% from last year, driven primarily by used unit volume. Total new unit sales increased 3.2% turning positive for the first time in 10 quarters. The decline in new same-store unit sales improved to down 2.2%. Our adjusted EBITDA for the fourth quarter, was a loss of $8.9 million during what is historically, our industry’s toughest quarter.

During the back half of 2023, we also reduced costs, by north of $60 million annually and will continue to look for SG&A efficiencies, throughout our business. As Matt alluded, we aggressively managed used inventory in the fourth quarter, to return cash to the business and recalibrate our inventory position heading into spring. We see our used business experiencing volume and margin trends in the first quarter of ’24 that are similar to the fourth quarter, as we work to restock our lots, for the upcoming season. On the balance sheet, we ended the quarter with about $185 million of cash, including $145 million of cash in the floor plan offset account. We also have roughly $271 million of used inventory net of flooring and $200 million of parts inventory.

Finally, we own $175 million of real estate, without an associated mortgage.

Marcus Lemonis: Thanks Tom. Look, as we all have indicated, we believe the trend lines are very clear. We expect 2024 to be a much better year, with the outlook after that only getting better. I’d like to turn the call over to the operator for the Q&A section.

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Q&A Session

Operator: Thank you. [Operator Instructions] Thank you. Our first question is from Joseph Altobello with Raymond James. Please proceed with your question.

Unidentified Analyst: Good morning. This is Martin on for Joe. Back in Tampa, you talked about likely margin compression in 4Q and 1Q to clear out non-current inventory. Do you anticipate the impact to be less in 1Q and expect normalization in 2Q?

Marcus Lemonis: So, I want to unpack that in two different categories. We believe that the new margins are going to sequentially improve as we continue, to move out of 2023, and really get back to a more normalized margin state for the full year. We actually think we have a pretty good shot at that. On the use side, as we mentioned earlier, when we had success in renegotiating the ’24 pricing. We had to acknowledge that the success on one side, could create a short-term risk for us on the other side, and that’s the used inventory values. We, through the fourth quarter, took a lot of gas and a lot of pain in liquidating that used inventory, and at the same time shut off our procurement of use, at a pretty rapid pace. So that we could bring cash back in, wait for the market to settle in with the appropriate new derived values based on pricing, and then we would work our way back up.

I expect the used margin compression, to continue through the end of Q1, because we really believe that if we can just bring our cash back in and turn that inventory, it will pay dividends in Q2, Q3, and Q4. The compression of margin that we’re experiencing in Q1, that’s self-inflicted, doesn’t change our outlook for the full year. It just moves a lot of the profitability, as expected, to the normal quarters where we make the bulk of our money, which is Q2 and Q3, and we will have a much better Q4 than we did the last two years.

Unidentified Analyst: Thank you. You mentioned your record and year for possibility for Good Sam. Do you have any further thoughts on Good Sam monetization, what that might look like in the potential timing?

Marcus Lemonis: I missed that one word, Good Sam activation.

Unidentified Analyst: Monetization?

Tom Curran: As we’ve spoken and released that press release just a couple months ago now, there is no further updates we have at this time. But we’ve been thrilled with the amount of outpouring and outreach that we’ve had from interested parties, and wanting to partner with us, and work with us and learn more, but as of this moment, no additional updates.

Marcus Lemonis: Yes, I mean, look, that’s the technical answer. Here’s the other answer, and that is we love this business. We love the Good Sam business, and when we look at the last five to 10 years, it has been our crown jewel, and we believe it will continue to be. The management changes that we’ve made there in the last several years have clearly paid dividends. And from our perspective, it’s really about understanding how we’re going to unlock value for our shareholders. There are a lot of different scenarios, and we’re not married to any of them. In fact, at the end of the day, we just want to understand what our options are, but that business continues to perform, and we expect it to continue to be the stable rock in our portfolio.

Unidentified Analyst: Great. Appreciate it. Thank you so much.

Operator: Our next question is from James Hardiman with Citi. Please proceed with your question.

James Hardiman: Hi, good morning, guys. So obviously, the most encouraging part about all this is how much better things have gotten in January and February, obviously, particularly on the news side. Help us understand how much of that improvement is sort of industry improvement, overall demand improvement, versus, what you guys are doing at Camping World. I’m trying to figure out, which of those two things would be really more sustainable, more important, obviously, that the whole industry has been waiting for that positive inflection point. Do you think, we’ve seen it, or is it just sort of stuff that you guys are doing to gain share?

Marcus Lemonis: I’m going to separate that into two very specific answers. One, we are very hopeful that the industry at large is rebounding. And that’s important for us, because the growth of the installed base is the giant feeder for our service business, our Good Sam business, our parts business, we need the overall industry to be healthy. We need the manufacturers to get back to working production cycles, where they’re shipping north of 350,000 units at a minimum. But we do believe that, there are things that we are doing that have allowed us to outpace our competitors. And when you look at the decision to drive down ASPs, consciously drive down ASPs in the face of what is still pretty material interest rates, we think that’s made a big, big difference.

I think the other piece that we are really starting to recognize is that the creativity that we have worked on in developing some of our private label brands, like the launch of Eddie Bauer, which previewed materially at both Hershey and Tampa, and the consistent performance of Coleman, has made a big difference. But we have also seen solid performance out of our Keystone business and our JACO business just the same. And we’ve seen good explosive growth with the new acquisitions of certain dealerships that had grand design. So, I think there’s a combination of a lot of things. Cleaning the inventory was actually, in our opinion, the biggest driver of all of it. And taking the pain that we took, and will continue to take for another couple months is really what is putting the wind in our sales, and setting us up nicely.

James Hardiman: Great. That’s helpful. And then maybe let me ask this, how much of your destiny in 2024 do you think you ultimately control? If we think about that 30% EBITDA growth, are you embedding some assumptions about where interest rates are going to head and when? And are there any sort of industry, wholesale, retail benchmarks that we should be thinking about that would be necessary, for you to still accomplish your goals?

Marcus Lemonis: We still believe that the general macro environment is tough. I mean, interest rates are still high, and we’re not going to prognosticate on how many interest rates cuts there will be, will probably in our mind thinking that there may be two, and they’re later in the year. So there still is some headwind that we have to work through. Us having a 30% improvement in EBITDA over a lower number is not any high five moment for our company. So – while we’re confident that we can get there, it is not a celebratory moment. We continue to work forward, in making sure that our inventory is clean, our SG&A is tight, so that we can enjoy that type of growth hopefully in the years past 2024. I think from our perspective, we’re expecting retail and wholesale, to be in the 360 to 370 range.

And while there are some that believe it could go higher. We have to be realistic that there’s still a possibility that it could even go lower. But we’re comfortable with that band. And what we’re seeing in the marketplace, both from shows, both from looking at other dealers’ websites, is that there is momentum happening with more than just us. We think we’re just outpacing everybody a little bit.

James Hardiman: Got it. Makes sense. Appreciate it, guys, and good luck from here.

Marcus Lemonis: Thank you.

Operator: Thank you. Our next question is from Daniel Imbro with Stephens. Please proceed with your question.

Daniel Imbro: Yes, hi. Good morning, everybody. Thanks for taking our questions. Marcus, last quarter, I think you and the team talked about taking maybe $60 million in costs out of the business, maybe to follow-up on the EBITDA growth outlook. As we see unit growth improve, how do you and the team feel about keeping those costs out of the model? And then as you go through the downturn, you know, never waste an opportunity, are there any other stones you’ve turned over that could drive further efficiencies in the model as you see the business positioning for growth again?

Marcus Lemonis: Well, there’s always a really important distinction between taking fixed costs out of the business and understanding that variable costs tied to commissions and advertising are going to go up as volume goes up. What we’re really focused on is driving down our SG&A as a percentage of our gross profit. That is really the focus. And I want to turn it over to Tom, who really was the architect, of looking through the expense structure and finding those things while recognizing that as volume comes back, right variable expenses are going to go with it.

Tom Curran: Yes, as volume comes back, as we need more people to pick up the phone and take the ups, there will be some increase in some of those variable compensation structure pieces, but we are continuing to look with Matt and the team and the analytics team at things like our lead propensity model and how can we get smarter with the advertising dollars that we do spend? How can we get smarter with our IT spend in certain areas? That’s not to say that we’re banking on it for the upcoming year, but there’s — we’re still turning over stones for sure.

Marcus Lemonis: But I’ll give you a small little case in point, right? One of the things that we work very hard on in ’23 is to renegotiate certain leases, look at exiting certain properties and just driving down those fixed costs that weren’t generating any revenue. We exited the active sports business. For the most part, we still have a very small web presence, but we started to get out of distribution centers in underperforming locations. Because we can’t afford to wait for the market to come back while we burn through money. Until we made some tough decisions, and we will continue to do that as we always have as we enter ’24. I will be really crystal clear about that. The expense reductions aren’t done. We’re always going to be looking for things that we can eliminate, getting out of things that don’t perform well, eliminating staff members that are contributing to the bottom line are generating revenue.

That is always going to be the thesis. I will tell you though, one of the things that we are excited to see is as rates come down, our floor plan expense comes down, and it comes down materially. For every 0.5 point that comes down, I mean you’re talking about big numbers on an annual basis when you have $1 billion of inventory. So as we look at driving advertising costs down, getting out of poor-performing locations, making sure we have the right staff levels, modifying pay plans, which is always tough, we are going to wait for some wind to come into our sales that is outside of our control, but that we anticipate happening at some point.

Daniel Imbro: Understood. Appreciate that. And then maybe for a follow-up, I think, Matt, you mentioned adding 25 to 30 dealerships this year. Can you remind us how many you’ve completed so far? And then of those you’ve done, are all of them open and kind of running on this lean Camping World model where you’ve worked through old inventory? Or is there still a digestion period through the middle of this year that maybe. we were waiting until 2025, before we’re getting the full contribution from those recently acquired and the soon-to-be acquired stores.

Matthew Wagner: So if I take a step back and try to answer your question, the sequential order. As of this moment, we have opened four of those locations so far. So, we should immediately start to generate revenue out of those specific locations. Of the other 25 to 30, we will have staggering open dates over the ensuing two quarters at least. Some of them might even bleed over to the third quarter depending upon. So when we think about what we’re assuming in some of these scenarios, some of them are just greenfield builds, whereby we built them, completed them in Q4 of last year in which case, we’ll be able to pick up just clean revenue. We don’t have to be picking up any sort of older model year units like 2022 units, or ’23s.

Which, to answer your question, ultimately, in some of these other scenarios, we could be inheriting a number of multiyear 2022s or ’23s. The good news, though, in these scenarios, we are negotiating all of these deals, whereby any sort of write-down is really just attributable to goodwill and it is factored into any sort of purchase price. So we are buying these model year ’22s and model year ’23s at appropriate market values. As such, I don’t think that should negatively impact our margin profile in the back half of next year. And we do believe that we’ll start to pick up some incremental gains year-over-year by Q3, Q4, which is why when Marcus suggesting the sequential improvement, we see a lot of upside here in Q3 and Q4 in particular, because of these acquisitions, plus all the different expense reductions we’ve been making, and we see a lot of upside there.

Marcus Lemonis: Just to put a finer point on it, we’re going to make acquisitions or close on those acquisitions here in a pretty steady pace over the next 12 weeks. And there are going to be ’22 and ’23 model year new units coming into our system. So if you analyze our website or run any metrics against our website, you will see a jump in that. We want to be crystal clear that the value of those units coming into our system that are ’22 and ’23 are materially lower than the original invoice cost. They are on the money as we would say. So there should be no negative gross profit experience coming from those acquisitions. So please, when you see those units come into our system, do not arrive that there is some sort of problem, just understand they’re on the money. And that was in large part, the reason we were able to make the acquisition of what was a very successful business that just got into inventory trouble.

Daniel Imbro: Really helpful. Best of luck, you all.

Marcus Lemonis: Thank you.

Operator: Our next question is from Mike Swartz with Truist Securities. Please proceed with your question.

Michael Swartz: Hey, good morning, everyone. Maybe just following up on the gross margin on new in the quarter. It was almost 19%, and that’s fourth quarter’s seasonally – I think one of the seasonally lightest quarters for gross margin. And I think you had mentioned, Marcus, that you’re kind of expecting flattish gross margin, if I heard that correctly, in new for the full year on a year-over-year basis. I guess, walk us through why that would be the case and maybe how to think about where that 19% goes over the next couple of quarters?

Marcus Lemonis: Yes. Well, the 19% was largely driven by assistance from the manufacturers who understood the necessity, and that had been pre-negotiated months and months and months in advance that, they needed to help us participate in that cleansing. On a go-forward basis, the normal margins are in that 13% to 14% range. And we really believe that, that is a sustainable long-term strategy that gives us the velocity we need to do volume and transactions. As we have said for a very, very long time, the lowest contribution of margin in our entire portfolio is the new margin. Even when it gets up to 15%, 16%, 17% during COVID periods, we rely on the F&I transaction, the service and parts transaction and all the Good Sam attachment to all those things, making that entire transaction more valuable.

One thing that we have to do a better job of in ’24 and ’25 is we need volume and market share back. Our company feeds off of a larger installed base. That has always and will continue to be our business model. So when volume contracts, it has a long-lasting effect on more than just the new sales of our business. It affects our F&I, it affects our compensation metrics. SG&A as a percentage of growth. So what we’re most excited about in ’24 is driving those ASPs down, going out and grabbing market share in categories that we believe our competition is late to the party on and understanding that volume and transactions. And getting volumes back to pre-COVID levels is job number one. Our new volume by location has hit a level along with everybody else in the industry that is unacceptable to us and not sustainable.

So as we want to kick start that volume again and get these same stores, not new stores, we get these same-stores to contribute at a level that they historically contributed to that. We need volume which is why we’re pushing down the ASPs, which is why we’re going to accelerate into new volume that really is the thesis. But I don’t want anybody to look at the Q4 new margin and think that’s some trackable event for the next 12, 24, 36 months. It’s an abnormality, but it was a planned abnormality that we knew, would help us push that through.

Michael Swartz: Okay. That’s helpful. Thank you, Marcus. And then maybe on the – used vehicle side, and maybe two questions. I guess I’m trying to understand if gross margins were so compressed and you were obviously clearing inventory pretty dramatically during the quarter. I guess volume didn’t react similarly. Was that simply due to not procuring as much? And then I guess, with what’s gone on in model year ’24 pricing? I know this kind of anomaly historically at least. I guess how does that feed into how you think about the RV Valuator tool going forward?

Marcus Lemonis: So when Matt and I drove away from the open house in September, and he had, had unbelievable success in renegotiating that ’24 pricing. We both looked at each other in the car and said, we better get ahead of these used values. One key component of the Good Sam RV Valuator is invoice pricing on new models is an input into that equation along with a number of other factors. And we knew that as that was a factor, that valuator was going to be impacted in terms of how it saw used values. We knew driving home on that day that we needed to be quick and fast in exiting all used inventory that had been procured under the premise that values were higher on the [technical difficulty]. At the same time, we were unsure of ourselves in terms of our willingness, our appetite to take on risk and continue to procure inventory at the same time while we knew there was a falling knife on used values.