Description

Note: Given the size, this idea is probably best suited for small funds and PAs. Given nature of the trade (shorting a levered equity), this is probably not suited for widows and orphans.

RumbleOn, Inc. (“RumbleOn,” “RMBL” or the “Company”) is an overearning, overleveraged, COVID benefiting retailer of highly discretionary products whose customers are largely dependent financing their purchases. In addition, RumbleOn in its current form is the product of 2021 reverse merger, the subject of a boardroom dispute with the former owners of the merged business (and largest equity holders), will likely trip its financial covenants this in 2023 and has lender with a history of taking the keys from its borrowers. In preview, I believe that RMBL is an attractive short as I think it is likely to be a bagel in 2023.

History

The RumbleOn story began in 2016 when Berrard Holdings acquired 99.5% stake in public shell company called Smart Server Inc. After Berrard sold slightly more than half of its stake to current RumbleOn CEO, Marshall Chesrown, and did a private placement in late 2016, the Company acquired the assets of NextGen Dealer Solutions for $4.75mm in February 2017.

NextGen Dealer Solutions was a vehicle appraisal and inventory management system that Chewrown promoted as a “100% online supply chain marketplace solution for the retail distribution of pre-owned vehicles to consumers and dealers” focused initially on pre-owned Harley-Davidson motorcycles.

After several additional stock offerings and private placements in 2017 and 2018 that raised an additional ~$60mm, RumbleOn acquired Wholesale LLC and Wholesale Express in October 2018 for a combined $23mm. These deals coupled with the 2019 acquisition of Autosport for $3.1mm, marked the Company’s expansion into the automotive wholesale and logistics businesses.

Between 2017 and 2020, RumbleOn generated a total of $106mm in gross profits and a combined $109mm of aggregate net losses as a vehicle wholesaler with the veneer of an online B2C powersports platform (in 2020 the Company sold just 458 powersports vehicles directly to customers). Not surprisingly, the Company’s stock performance during that time looks like what one would imagine for a Carvana wannabe that burned a lot of money (peaking at >$200 / share in September 2018 before troughing at ~$4 / share during COVID).

In March 2021, the Company pivoted once again and took its current form when it announced the $575mm acquisition (consisting of $400mm in cash and 5.8mm RMBL shares) of the RideNow dealership group. At the time, RideNow was the largest powersport dealership group with 46 stores largely concentrated in AZ, FL and TX. RideNow was primarily a motorcycle and off-road vehicle (“ORV”) dealer with Polaris, BRP and Harley Davidson accounting for ~66% of new unit sales.

The $575mm purchase price equated to ~6x 2020 EBITDA and ~16x 2019 EBITDA as the powersports industry went through a COVID boom (more on this later) and was funded with a $280mm L+825 TL provided by Oaktree, $120mm from various public equity offerings of RMBL and $175mm of rollover equity. RideNow’s co-founders Mark Tkach and William Coulter (“Tkach and Coulter”) became RMBL’s largest shareholders with a combined ~32% of shares outstanding. The RideNow transaction closed on August 31, 2021.

Continuing its buying spree, in November 2021, RMBL announced the acquisition of the second largest powersports dealership group, Freedom Powersports, for $130mm ($83mm for the dealerships and $47mm for the associated real estate). At a 9 cap on the real estate, I estimate that Freedom transaction was done at ~4x 2021 EBITDA and was largely funded through incremental Oaktree TL. At the time of acquisition, Freedom had 13 locations, primarily in TX, bringing the Company’s total store count to 55.

In February 2022, RMBL announced that Tkach and Coulter, resigned their positions with the Company and stepped down from the Board less than six months after the merger. RMBL noted in their Q3 earnings report that it had reached a global settlement with Tkach and Coulter without providing details of what that settlement entailed.

Also in Q3, the Company lowered FY ’22 EBITDA guidance from “at least $145mm” to “at least $125mm” and announced it would “explore strategic alternatives” for its Automotive business. The Automotive business generated ~$10mm of YTD Q3 ’22 gross profits that the Company noted at ICR would cost ~$3mm to “abandon.”

Finally, I would be remiss if I didn’t note there have been a handful of recent financial red flags. In May, the Company switched auditors (again) as the auditors for 2020 and 2021 issued an adverse opinion on the Company’s internal controls. Then last week, RMBL and its CFO parted ways after less than a year on the job.

State of the Industry, 2023 Estimates & Covenant Math

Between 2015 – 2019, US new motorcycle registrations declined by ~23% as interest in motorcycling waned (motorcycles account ~40% of RMBL’s powersports unit mix). However, COVID was largely responsible for a renaissance in the powersports industry as increased demand from a desire for outdoor activity and stimulus checks was met with supply chain shortages that created a perfect storm for powersports dealers.

COVID created a situation where demand for vehicles was significantly greater than supply which enabled powersports dealers to extract excess margins on new and used inventory (similar to the dynamic for cars but even more pronounced).

In 2019, RideNow generated 10.7% gross margins on new units and 12.6% on used retail units. In Q2 ’22, new and used retail unit margins peaked at 20.3% and 18.1%, respectively. Given supply demand dynamics, it was not uncommon for dealers to charge several thousand dollars in arbitrary set up and prep fees above and beyond MSRP that led to the significant new unit margin expansion while on the used front, constrained new unit availability led buyers to pay up for any available used units to the benefit of dealers like RMBL.

As the RMBL CEO recently acknowledged at ICR, the supply chain has recovered, dealer inventory is “fastly reaching normalized levels” while demand for everything but the highest end units is beginning slow. The industry is returning to a normal state where there is plenty of supply, which RMBL acknowledges will impact margins: “I would tell you on the gross profit, if you look at pre-COVID right now just as a proxy was about 23% gross profit. At the peak it was just short of 31% and that's the peak of short supply and demand. That's certainly going to be normalized. We don't see it going to 23%, but we certainly don't see it sustaining at 31% either.” I assume 26.7% gross margins in our 2023 Base Case.

In addition to margin compression, the powersports industry as a whole and RMBL, in particular, is likely to sell substantially fewer new and used units in 2023 than were sold in 2022. According to the Polaris, roughly 60% of industry wide new units are financed. Given RMBL’s geography, unit mix and best in class F&I profitability per retail unit (~$1,800+ vs industry at ~$1,000), I believe that RMBL almost certainly skews higher than the industry in terms of the percentage of new units that are financed. RMBL’s core customers are largely finance customers who will see their monthly payment on a new or used powersports units double (or more) vs what was seen in 2021 and early 2022.

In my 2023 Base Case, I assume a (12.5%) reduction in new and used retail units sold along with new and used unit margins of 15% and 14%, respectively. All of these figures are considerably above 2019 levels (when rates were much lower) and thus I believe there is considerably more downside than upside to these estimates.

It is also worth noting that a significant portion of parts, accessories and services (“PA&S”) revenue for someone like RMBL is tied to new or used unit sales. It is not uncommon for a new UTV to have $3k+ in accessories that would show up in accessories not new unit revenue. Consequently, unlike car dealerships, this revenue stream is correlated with vehicle sales for powersports dealers and will likely decline in a world of where there are fewer vehicle sales. In addition, given the aforementioned supply / demand dynamics, dealers did not have to discount accessories purchased with purchases, which was common practice prior to COVID. Thus, it is likely that PA&S margins will decline in 2023.

RMBL’s Term Loan with Oaktree has two financial maintenance covenants: Senior Secured Net Leverage must be less than 3.75x and Total Net Leverage must be less than 4.25x. Adding it all up, I believe that unless all of the stars align (as represented by my Upside Case), that RMBL will bust through those covenants in 2023 (even in the Upside Case, RMBL barely skates by). Oaktree is an experienced distressed for control lender who has the advantage of owning the entire credit facility, which makes it more likely than in bank debt situations owned by a number of CLOs, that if RMBL were to bust its covenants that the Company would be pushed into bankruptcy (prepackaged or otherwise) with Oaktree owning the Company on the other side to the detriment of shareholders.

I believe the sell side analyst community is not current on these dynamics and has stale estimates as I am seeing 2023 consensus EBITDA of ~$118mm, which I view as fanciful in the current environment and headwinds facing the industry. I expect RMBL to issue 2023 guidance in March when it reports Q4 2022 earnings and think this will be a catalyst a dramatic re-rating of 2023 expectations vs current consensus.

What is RumbleOn Worth?

Powersports dealerships have historically traded for 2-3x Blue Sky value or ~4-5x EBITDA. These values are generally lower than automotive dealerships as powersports dealerships tend to be smaller (RideNow’s average roof only generated less than $1mm of EBITDA in 2019), franchise agreements are less valuable (powersports dealerships tend to be multiline and therefore tend to have a smaller radius for competing dealers), and fixed operations (PA&S) generates a lower percentage of gross profitability (PA&S will account for ~25% of RMBL’s 2022 gross profitability vs ~37% for ABG).

As mentioned, with Oaktree owning the entire term loan, I think a covenant bust is highly likely to lead to a credit event and restructuring in which the current equity is wiped out.

What’s the downside if I’m wrong?

In order to lose money on this trade, one needs to believe that RMBL is capable of generating ~$100mm+ of EBITDA and the business being worth more than 5x. I view these outcomes as unlikely but if you’re wrong on a levered equity short, like this one, one does have downside exposure.

Risks

Significant decline in interest rates

Very healthy US Sunbelt consumer

Oaktree doesn’t enforce

Catalyst

FY ’23 Guidance (likely in conjunction with March earnings)

Covenant Trip

More Executive Turnover