Description

"I'm feeling better about our 2020 prospects […], now that we are getting these non-RV centric locations behind us and not making acquisitions, […] I want to hoard cash, and I want to delever at this point. And I want to be laser focused." - Marcus Lemonis, CWH CEO

Camping World is returning to business as usual after a year and a half of industry-wide inventory destocking and as it cleans up a questionable acquisition.  After two years of overzealous promises and missed expectations, the street views CWH as a show me story despite clear evidence of improved industry fundamentals and strong underlying tailwinds in the core business. 

Business overview

Camping World (ticker: CWH) is the largest network of RV dealerships in North America. Its main business is selling RVs through its network of 153 dealerships across the country under the Camping World and Gander RV brands.  CWH also sells parts and RV related products through its dealership footprint and service warranties through its Good Sam membership program. CWH was founded in 1966 in Illinois but is largely the product of a roll up strategy started in 2006 under CEO Marcus Lemonis (yes, that Marcus Lemonis).  

There are two widely cited sources of data in the industry that everyone watches for indications of which way the market is going - the RVIA publishes public wholesale shipment data (sell-in) and the Statistical Surveys Institute (SSI) publishes, for a subscription fee, retail unit sales registered with each state (sell-out).  The RV industry's stock prices are highly correlated to movements in these two indicators. CWH's peers include Winnebago (WGO), Thor Industries (THO), Lippert Components (LCII) and Patrick Industries (PATK). Collectively this group was down 60% from Jan 2018 to Dec 2018 as industry wholesale shipments started to slow. Our diligence and call work on the subject consistently indicated that this weakness was related to a temporary inventory oversupply.  Stocks bounced around the bottom through the first half of 2019 as industry shipments remained slow and retail started to show signs of weakness, which some feared was a sign of a looming recession. Through the summer and into the fall of 2019, retail shipments did not fall off a cliff as feared and wholesale shipments started to improve, which confirmed that the issues were related to an inventory glut rather than an upcoming recession. Shares of manufacturers and suppliers rebounded through the second half of the year. 

As per the chart below, there is a 71% correlation between the indexed peer group and RVIA.  However, Camping World has not rebounded to the same degree in large part because they made an ill-advised acquisition.  Camping World has missed their guidance for the past 2 years and the Street is now waiting for confirmatory evidence of their “clean house” strategy.  CWH sits >60% below its early 2018 high compared to the industry, which currently sits around 30% below its high. We have been following these RV names closely and anticipated the RV inventory destocking thesis to play out as it did.  We think there is still room for Camping World to run because the reasons underlying CWH's relative underperformance are largely underappreciated by the market. As the company moves past its messy financials and gets back to business as usual, the laser focused story of Camping World will become more clear. 

Industry Supply/Demand

Recreational vehicles (RVs) have long been popular in the United States with retirees.  RVs are categorized as either motorized (vehicles with a motor) or towables (units that are designed to be towed by a truck or SUV).  Of the 485,000 units sold per year, 88% are towables. These towable units make up 65% of industry revenue due to their lower price point compared to motorhomes. 

The chart below plots retail RV unit sales per year and year over year growth.  It is clear that RV sales were heavily impacted by the financial recession. However, retail demand post 2008 has been strong, with a 12% CAGR from 2012 to 2017.  While the demographic shift of baby boomers entering retirement driving demand for more RVs was expected, millennials have driven a lot of unexpected growth. According to Thor's analysis of SSI retail data, the percent of buyers under the age of 55 has increased from 39.6% in 2014 to 51.5% in 2018 as millennials, who are more interested in experiences over things, have started buying RVs.  The younger demographic has also supported the shift towards lower priced towables. While this is a highly cyclical industry, there are also strong secular tailwinds driving growth. 

The period from 2012 to 2017 is largely thought of as the "gangbuster" years where wholesalers could not keep up with demand.  This reached a peak in 2017 when, after a year of allocated supply, dealers over ordered at the September dealer show for the upcoming 2018 season assuming they would not receive their full orders (in line with prior years.)  Two important things happened: 1) manufacturers, who had been working on reducing lead times and increasing capacity, fulfilled all the orders that were placed and 2) while 2018 retail sales grew, the growth slowed compared to 2017.  This left dealers with an inventory glut towards the end of 2018 and going into 2019. 

The chart below plots sell-in vs. sell-out over time.  The two are typically at parity. You can see the divergence in 2017 where manufacturers oversupplied the industry, which was followed by a steep drop off in manufacturing in 2018/2019.  Since the destocking began in 2018, around 100,000 units have been taken out of the channel and inventory turns have increased by almost a full turn according to Patrick Industries, the second largest supplier to RV manufacturers. To put this in context, inventory levels are lower than they were in 2014 despite retail demand being 40% higher.  This period of inventory destocking was accompanied by a sluggish start to retail demand in 2019, where unusually harsh weather contributed to low attendance at major RV trade shows in Q1. In the Spring, historic floods along the Missouri and Mississippi Rivers led to numerous campground closures in the Midwest. The 2019 January to May period was the wettest on record for the country, which caused hesitation for potential buyers. While still the third best year on record, consumers took their foot off the gas after 4-5 years of incredible demand.

Implications for CWH  

As it related to CWH, their inventory on the ground was down 10% per dealership, as of Q3 2019.  This is largely in line with the commentary we have been hearing from other dealers. Going into 2020, wholesalers are guiding to a flat production schedule.  Assuming dealer destocking is done and inventory is where they want it going forward, a flat wholesale production schedule implies retail would be down greater than 10%, or back to 2014 levels.  That just does not line up with our feedback from dealers or consumer sentiment. An early datapoint was released by RVIA on Monday that pointed to January wholesale shipments up 30%. Granted this is on the back of a bad January in 2019, but we think industry participants are playing it cool with guidance after a pretty terrible year for everyone.  

Consensus is baking in a flat to down LSD outlook for CWH volume, with pressure in the new units division somewhat offset by stability in used units.  While we expect CWH to provide more detailed guidance on unit shipments for 2020 on the call on Thursday, peers have indicated that the Jan/Feb retail shows reported y/y growth in traffic, sales and revenue; in some cases double digit growth. 

• PATK Q4 2/13/2020 - Regarding retail demand, initial 2020 reports indicate that the early RV dealer shows held throughout the country have experienced record attendance and strong buying levels, including, in particular, the Florida RV Supershow in Tampa, which has been viewed as a gauge of potential retail demand for the new selling season. […] We're hearing solid demand. […] We're hearing good news out of the shows. We're hearing traffic's up. We're hearing as well, sales are up and unit sales are up. So everything is positive at this point from our perspective on the retail side.

• LCII Q4 2/11/2020 - With the inventory issues of 2019 largely behind us, consumer sentiment trending positively, we remain optimistic that the RV retail environment is better positioned heading into the first half of 2020. Early results from recent shows have been better-than-expected with almost all OEMs reporting solid traffic and show sales. We are currently assuming retail in 2020 to be flat to down 5% given uncertainty in the back half of the year.  […] you've heard a little bit over the last 30 days about show report and a lot of the foot traffic's up. I hear anywhere from 30% to 60% on average. A lot of the OEMs are reporting retail show sales upwards of double what they did last year. And then just talking to some of our OEM partners, our large ones over the last couple of weeks, the most pertinent color is that their rates are up. And it feels like, in some cases, some of our bigger customers were up double digits in January.

• CWH Q3 11/07/2019 - As it relates to 2020, […] I wouldn't expect us to be forecasting anything too negative on the new side, and we are going to be forecasting something positive on the used side.

We have also heard really positive things from our checks with dealers coming out of the early shows - retail is up, inventory is down and weather is better than last year (so far, knock on wood).

• RV dealer 2/2020 - For everyone it’s a little bit surprising.  Every forecast we've been given or heard is that this year is going to be flat or down a little bit. Everyone I know is not experiencing that.  The early shows were pretty fantastic. By now it would have slowed down if it was a fluke like good weather or something like that. No reason to believe we don’t beat last year.  Only question is what happens closer to the election.

• RV dealer 2/2020 - The consumer RV shows in January and February are an early barometer of how the rest of the year is going to shape up.  Cleveland was a really good show - best on record. So was Tampa. Discounts are narrower which means we are getting better margins.  Inventory is 10% lower this year so we don't need to flush out our lots by offering discounts. Indicators are coming out better than expected, but everyone is being more careful than in previous years.

• RV dealer 2/2020 - Everything is really good.  We've done 9-10 shows so far in 2020 and unit sales are up ~15%.  Everyone is expecting a flat market because of the election year but it's been off to a fast start so far. Banks have increased their willingness to lend to consumers in the last 7 or so months.

Additionally, because the RV industry is typically used as a barometer of the general economy, it tracks pretty closely with consumer sentiment.  On-the-ground consumer sentiment is up despite it being an election year, and expectations in the RV industry are low. This set up is attractive for dealers like CWH because either unit shipments are poised to beat or if inventory is tight, margins will outperform. 

Gander issues are behind them

While the RV industry was in correction mode, Camping World was also dealing with a questionable acquisition.  In May 2017, Camping World acquired struggling outdoor retailer, Gander Mountain, out of bankruptcy. The plan was to re-merchandise, selectively re-open only the profitable stores and add RVs to the retail offering in select stores.  This ended up being a largely failed attempt into the troubled world of big box retailing which ended with the company liquidating its inventory and closing all retail-only stores by the end of 2019. 

Due to the liquidation of inventory and closing costs, CWH EBITDA is expected to be less than $200mn in 2019, nearly half the EBITDA the company generated in 2017. Net debt / EBITDA was ~2x at the time of the acquisition but has likewise increased to ~6x ttm.  With a return to a more normal EBITDA and cash flow, leverage will be closer to 3x in 2020, which is more in line with where they have operated historically, at about 4x as a private company. If you were to screen for this company, the numbers don't look good, so let's dig in a bit more.

Gander is an outdoor retailer that started in the 1960s as a catalog operation.  The company went through many iterations but ended up as a large outdoor retailer, similar to a Cabelas or Bass Pro Shop.  The company filed for bankruptcy in 2017. In May 2017, Camping World bought the right to operate the Gander stores and the Gander IP out of bankruptcy for $38mn.  Despite two years of its best efforts, CWH threw in the towel in September 2019 by announcing the closure of all non-RV Gander stores. At the time, CWH was operating 50 Gander Outdoor stores, of which 23 sold RV's.  Of the 27 retail-only stores, CWH plans to close 21 and obtain zoning rights in order to sell RVs at 6 stores, leaving the total Gander RV store count at 29 when they are through.

When all is said and done the Gander acquisition cost $242m consisting of:

• $38mn original purchase price

• $15.6mn for the existing inventory of one of Gander's watersports subsidiary Overton's Inc.

• $22.2mn for "Other" Gander and Overton assets with the most important being the right to designate any real estate lease for CWH in addition to IP rights, operating system, platforms, distribution center equipment, the e-commerce site and equipment for the retail operations

• $70mn "pre-opening" costs

• $100mn estimated 2-year operating loss

• $35mn 2019 restructuring plan costs

While on the face of it, the Gander acquisition seems like an obvious failure, under a different lens, CWH just acquired 29 RV dealerships for a 5.1x multiple (very back of the envelope math shown above).  They would have done better to just acquire existing dealerships with a customer base but it isn't that far off of what an existing dealership would cost in the market. Based on Camping World's comments, RV dealerships are typically sold for a multiple in the 1-4x range.  While we wish they would have avoided this detour down big box row, we view this as an expensive RV dealership buy.

However, this diversion had another cost - management's credibility.  Despite the trouble at home, management continued to spin a positive story as they consistently revised guidance down.  2018 EBITDA came in 28% below their original guidance and 2019 full year guidance was revised down by 42% as of Q3 and consensus is still a bit below that.  

The sell-side is clearly tired of this story as margins have crept from >8%, Marcus' internal hurdle, to below 4%.  Management has tried to sell enthusiasm and lofty targets instead of Gander results. We are glad the Gander chapter is behind them.

Some transcript highlights:

• 5/2017 - For the quarter, we were 8.1% EBITDA margin. I will not be doing anything or taking on any liabilities that put that EBITDA margin in jeopardy.

• 9/2017 - I could personally not be more proud of what's ahead of us.

• 11/2017 - One of the things that everybody on this call knows is I do not set any expectations that I do not think I can absolutely hit. And it is our expectation that in 2019, that business will do somewhere north of $300 million of revenue. But more importantly, much more importantly, we think the contribution from those 60-some stores would be in the 8% EBITDA margin range.

• 2/2018 - I'm a "put up what you can absolutely do and you better darn well deliver" kind of guy.

• 5/2018 - Despite some of the logistical challenges and slowed opening pace, we are extremely excited about what the team has accomplished.

• 8/2018 - we are revising our 2018 consolidated adjusted EBITDA outlook to the $370 million to $380 million range. Analyst Q: So just looking at the revision to guidance today, it looks like Gander will be on the order of a $60 million EBITDA loss this year. And then -- so the expectation is that, that goes to $100 million EBITDA profit in 12 to 18 months. So it's $160 million swing. Is that the correct way to think about it? A: Yes, sir.

• 11/2018 - I'm pretty pleased with how things are trending at Gander. […] I feel like we were able to achieve the EBITDA forecast that the analysts had for us even though it fell short.

• 5/2019 - Our initial outlook for 2019 is for total revenues in the range of $4.9 billion to $5.1 billion and adjusted EBITDA in the range of $320 million to $340 million. […]  To be candid, I'm pleasantly surprised as we have pivoted more severely away from thinking about Gander as a retail business and more as an RV company, a sister to Camping World.

• 5/2019 - Analyst Q: Now I don't want to beat a dead horse here, but -- and I certainly appreciate the optimism, Marcus. But we're having a really hard time reconciling how your full year EBITDA outlook can be unchanged. A: Okay. And so as we think about the balance of the year, we expect the second and particularly the third and the fourth to be materially better than it was in 2019. […] And our first quarter performance was in line with our expectations as it relates to that forecast. […] We think that the -- if you look at the first quarter and you match up against what the analysts provided in terms of their assessment and what our results were, there was just a disconnect on the SG&A side. And I don't want to debate who is right or who is wrong, but I know that ours was in line with our full year forecast.

• 8/2019 - [Lowering] our 2019 year adjusted EBITDA guidance around the mid to low $200 million range.

• 11/2019 - As you know, on September 3, 2019, we reached an inflection point in our company's history. We announced a strategic shift to refocus our company around locations that have the ability to sell and/or service RVs. […] lower adjusted EBITDA by $30 million or $40 million in 2019. I am extremely excited about the future of Camping World. Our vision is to continue to build long-term legacy business that makes RV-ing fun and easy

Valuation

Everyone is tired of Marcus Lemonis, for good reason.  However, he is aligned with shareholders - he has more than $500mn tied up in Camping World stock through his common units ownership that are convertible 1:1 for Class A shares, a substantial portion of his net worth.  Additionally, by owning CWH, we are in good company with Abrams Capital, a 16% shareholder. Abrams Capital is a value focused fund managing nearly $9bn and run by David Abrams, a protégé of Baupost's Seth Klarman. Throughout 2019, in the midst of inventory destocking and peak Gander losses, Abrams Capital increased their ownership from 10% to 16%.  

For 2020, industry participants and the Street generally expect retail to be down LSD for the year.  We are estimating EBITDA of ~$290mn or a 6% margin. A large part of the improvement in 2020 as compared to 2019 comes from lapping the $75mn in one off costs that management outlined as it relates to the 2019 closure of Gander retail.  These costs consist of 2019 operating losses, severance, selling unused distribution facilities and contract terminations. The remainder of the improvement in EBITDA is due to a slight improvement in RV margins on flat volumes. While flat volumes are higher than industry expectations, we still believe this is a conservative assumption.  Under this scenario, CWH returns to generating cash and focuses on paying down debt. Our target price is $21 and a ~20% IRR on an 8.5x multiple (compared to through cycle industry averages in the 8-10x range). As the company returns to business as usual, it should generate meaningful cash flow in order to pay down debt. The business currently trades at a 4% dividend yield. 

We think there is a high probability that retail demand is up in 2020.  We view that as a free option on the investment. Assuming retail is up LSD, we estimate 2020 EBITDA of ~$335mn or a 6.5% margin with a target price of $26 and an IRR of 33%. 

Risks

• Recession

• Execution risk on cleaning up Gander

• Lemonis' lack of focus on this business (he has many other ventures)

Catalyst

• Finish cleaning up the Gander liquidation and return to business as usual

• RV retail sales do better than expected

• Long term, there remains ample room for a dealership consolidation