CAMPING WORLD HOLDINGS INC CWH
December 23, 2018 - 11:14am EST by
Saltaire
2018 2019
Price: 11.24 EPS 0 0
Shares Out. (in M): 90 P/E 0 0
Market Cap (in $M): 1,009 P/FCF 0 0
Net Debt (in $M): 1,186 EBIT 0 0
TEV ($): 2,120 TEV/EBIT 0 0

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CWH – AOF Investment Thesis

December 2018

Figures presented in US$ millions, except for per share data, ASP figures and unit volumes.

All share price data as of market close, 12/21/18.

All EBITDA figures presented reflect Adjusted EBITDA as defined by CWH.

Camping World (“CWH” or the “Company”) is the largest RV retailer in the U.S., with a comprehensive portfolio of services, products and resources for RV enthusiasts. We believe that investor concerns relating to cyclicality and a misunderstood shift in strategy have created a compelling buying opportunity.

CWH’s shares currently trade at ~6.3x Guidance EBITDA, but ~4.7x our discounted PF Gander EBITDA, a compelling valuation which we believe represents a significant discount to intrinsic value.(1)

We recommend Camping World as a long.

Overview

Camping World offers RV enthusiasts over 10,000 products and services. In 2017, the Company’s core RV segment sold ~67,000 new RVs and ~30,000 used RVs. CWH also offers numerous ancillary offerings for RV owners, including parts and services for existing RVs (“P&S”), finance and insurance for sales of both new and used RVs (“F&I”) and Good Sam, the world’s largest membership club for RV owners.

CWH in its current form is the result of three acquisitions. Legacy Camping World was founded in 1966 and operated principally as an RV accessories retailer, while Good Sam started life as a magazine publication and later expanded into insurance and emergency roadside assistance programs. In 1997, Good Sam acquired Camping World for $123mm, forming “Camping World Good Sam.”(2) CWH’s current CEO, Marcus Lemonis, founded an RV dealership named FreedomRoads in 2003, which was acquired by Camping World Good Sam in 2006, with Lemonis being placed as CEO of the Camping World division.

However, it wasn’t until 2011 when CWH consolidated the three businesses and placed Lemonis as CEO of the combined company, that the current incarnation of Camping World, a full-service provider of products and services for RV enthusiasts, was created.

In 2011, CWH accepted an equity investment from private equity firm Crestview. Lemonis and Crestview operated CWH in private hands until the Company’s IPO in 2016. Shares debuted at $22.00 / share. Two years later, Crestview and Lemonis, in partnership with the founder, control ~11% and ~43% of CWH’s common stock, respectively.(3)

Today, Good Sam and Camping World offer numerous synergistic benefits as a consolidated entity. Good Sam customers pay $27 per year for access to exclusive member events, a detailed directory of nationwide camping areas and related services, and discounts on various products and services including a 10% discount on all purchases made through the recently acquired Gander Mountain sporting goods company. Also through Good Sam, customers are able to purchase extended vehicle service contracts, emergency roadside assistance programs, property and casualty insurance and travel protection. The combination of Camping World and Good Sam allows CWH to achieve incremental leverage through the targeted use of the Good Sam database.

Since the 2011 business consolidation, CWH has also made significant progress 1) growing its other businesses (parts & services and finance & insurance) – new and used RV sales now represent ~37% of GP, even less of total EBITDA(4), and our analysis suggests a 10% decline in new RV unit sales would result in a 10-12% decline in total EBITDA(5), limiting concerns relating to cyclicality; and 2) expanding the market for RVs by focusing on lower priced products, with CWH’s new RV ASPs having declined 26.1% over the past five years(6).

The consummation of these initiatives results in a collection of stable, high margin, recurring revenue businesses designed to support all RV enthusiasts, while growing the market for RVs and further strengthening the Company’s competitive position as the market leading RV dealership.

In May 2017, CWH announced the acquisition of recently bankrupt Gander Mountain (“Gander”), an outdoors-focused retailer, along with its boating business, Overton. Initially, CWH management had stated that the acquisition of Gander would diversify the Company’s revenue streams into outdoor, hunting and fishing products and provide an additional platform to promote Good Sam memberships. This perceived pivot away from the core strategy was troubling to many investors. However, as the launch date for the re-opening of a subset of the stores approached, management divulged their actual strategy, which they had withheld for competitive reasons: launch RV dealers within former Gander Mountain locations in order to rapidly increase dealership unit count at a highly attractive ROI.

Investment Thesis

We believe that CWH’s stock has been oversold due to the: 1) concern that RV shipments will slow down; and 2) skepticism relating to the Gander Mountain acquisition. We believe that these two overhangs have created an opportunity for investors to acquire shares of a market leader experiencing secular growth in a fragmented industry, with diversified and recurring revenue streams and numerous and highly attractive growth opportunities.

Our CWH long recommendation is based on the following investment thesis:

1)  Concerns around cyclicality are overstated and overlook the Company’s dominant market position and potential to further consolidate an attractive and growing market;

2)  The Company has undergone a significant transformation since 2011 and has a highly compelling acquisition model with numerous and diversified earnings streams;

3)  Gander traffic is a transformative opportunity to scale RV business into new markets at an attractive ROI;

4)  Management’s focus on increasing Good Sam penetration is highly additive to value;

5)  Highly incentivized management team with a track record of making decisions for the long term

 

1 )       Concerns around cyclicality are overstated and overlook the Company’s dominant market position and potential to further consolidate an attractive and growing market

Given the high ASP and discretionary nature of RV purchases, investors expect a slowdown in RV sales. This is driven by the perceived point in the economic cycle, matched with strong RV unit growth to date and the decline in RV sales during the last recession. However, we believe that calculations tying CWH’s earnings potential with RV unit sales during the last cycle overstates the potential impact of RV unit declines on CWH’s EBITDA.

In addition to a highly diversified business model, the Company’s highly variable cost structure minimizes the EBITDA impact of a potential decline in unit volumes

Investors are concerned that a potential reduction in new RV unit sales during a downturn would have a disproportionate impact to EBITDA given the cost structure associated with owning and operating retail stores. However, ~65% of CWH’s SG&A consists of wages, bonuses and commissions, while ~6% is attributable to advertising costs, and the remainder consists of other G&A items.

Of the ~65% of SG&A consisting of wages, bonuses and commissions, we believe that a significant portion of these costs are variable. Management has indicated to us that 40% of gross profit related to RV / F&I sales is paid out in commissions, which provides comfort of the variable nature of CWH’s cost structure. Supporting this is the fact that every employee at the dealership level in a sales function has a significant portion of their compensation tied to commissions. Similarly, a substantial portion of compensation for managers is tied to EBITDA performance. 

In an effort to quantify the impact of a cycle to CWH’s EBITDA, we’ve directionally reviewed with management our analysis below, which assumes a 10% decline in new unit volumes. As laid out below, a 10% decline in new unit volumes is expected to result in a ~$40mm decline in EBITDA.  
 
 

We also believe this analysis is conservative as the only SG&A reduction we’ve assumed is related to CWH’s 40% commission structure, a percentage that is quantifiable and directly impacted a reduction in sales. However, in a downturn, management has indicated that they would seek to make incremental rationalizations in other areas of G&A (~29% of SG&A) and advertising (~6% of SG&A) to further minimize the impact to EBITDA.(8)

Industry growth has been driven by both cyclical and secular underpinnings and CWH has played an active role in expanding the RV market

Contrary to widespread belief, the economic environment is not the most important factor in the purchase decision for an RV. According to a 2011 industry survey, the top three factors that played a role in determining the timing of their RV purchase were: 1) family reasons (family transitions, retirements, etc.); 2) plans for a specific trip or vacation; and 3) the availability of good buys and discounts. Lower on the list were financial situation at the time the purchase and cost and availability of financing.

While RV purchases are discretionary in nature, we believe the recent uplift in RV sales has been driven by a broader, secular shift towards camping activities. In particular, 1) lower priced units, underscored by a mix shift towards towable RVs, which carry a lower ASP than traditional motorhomes ($15-60k vs. $75-$225k); 2) younger families more interested in the outdoor / RV segment(10); and 3) increased towing capacity.

The shift towards lower priced RVs decreases the required income to purchase an RV in a challenged macroeconomic environment. Loans for towable RVs are also shorter in duration, which should fuel an accelerated trade-in cycle, of which CWH is a beneficiary of given its market position in used vehicles.

CWH has played an active role in the shift to towable and lower-priced RVs. Since the Company’s IPO, Marcus Lemonis has repeatedly emphasized the Company’s conscious effort to drive mix towards lower ASP RV’s in an effort to expand the market. Towables now represent ~84% of CWH’s RV sales(12). The Company has also worked with Thor to produce private label RVs, which sell for an average of $5,000 below branded alternatives.(13)

Since 2013, in inflation-adjusted terms, the ASP of CWH’s new / used vehicles has declined 26.1% / 19.4%(14)Assuming a 240-month lease (leases are typically 180-240 months), this translates to a reduction in monthly payments from $200 to $148 for new vehicles and $114 to $92 for used vehicles(15). As a result, the RV market is more accessible today than it ever has been.

In a scenario where new RV unit sales slowdown, CWH should fare relatively better than the broader industry

RV unit sales experienced an average decline of 44% over the past four cycles, compared to light vehicles which experienced a 24% decline(16). This metric is also skewed by the decline experienced between 2007 and 2009, where RV unit sales declined 53%. Importantly, of the 53% decline in unit sales, towables unit sales declined 49% while motorhome unit sales declined 76%(17). Given CWH’s 84% towable mix, we believe CWH should insulate fare relatively better than the industry broadly, should RV unit sales decline.

An important driver of RV sales is credit availability; CWH’s customers have surprisingly high credit scores, implying some cushion in most scenarios

With an average FICO score of 720 and default rates at less than 0.5%, CWH’s customer is demonstrably ‘safer’ to lend to vs. customers in the auto industry. Our discussions with management and channel checks have confirmed that default rates remained low following the 2008 downturn, but given that banks had minimal prior experience with the RV default rates in an adverse credit environment, they abruptly cut off financing(18). As a result, if the next downturn is not characterized by a significant credit crunch, we believe that new RV unit sales should remain more insulated than in the previous cycle. This is supported by the fact that between 1999 and 2001, RV shipments declined ~20% vs. the 53% in unit declines experienced in the most recent downturn.
 
Also, given that financing terms are 180-240 months, the impact on monthly payments as interest rates increase is minimal. As an example, based on a $35,000 ASP for a new RV, a 180 month financing term equates to ~$194 a month. A 1-2% change in interest rates should have a nominal impact to an industry where rates have been as high as 17%.

2)       The Company has undergone a significant transformation since 2011 and has a highly compelling acquisition model with numerous and diversified earnings streams

Thanks to the Company’s shift away from traditional RV unit sales, a significant portion of CWH’s EBITDA is not tied to the sale of RVs, but instead a collection of resilient, high margin products and services.

The table below presents an overview of CWH’s five core businesses:
Of CWH’s five business lines, its P&S and Good Sam divisions represent stable and recurring earnings streams uncorrelated to the RV cycle.
 
In fact, CWH’s P&S business could experience an uplift in sales should RV unit sales slow down. By deferring a new RV purchase, RV owners will continue to extract incremental use out of existing RVs, requiring additional service and maintenance support. 
 
Meanwhile, Good Sam represents recurring EBITDA that has almost zero correlation to new RV unit sales. We believe that the Company’s Good Sam business warrants a premium multiple relative to CWH’s base business.

Finally, of the 28 million Americans that participate in camping annually, ~60% do so in a tent, suggesting meaningful runway to convert tent campers to RV owners, particularly as ASPs continue trending lower.

CWH deploys a highly accretive acquisition strategy, while a downturn enables CWH to scale more aggressively at a lower cost

CWH has embarked on an aggressive acquisition strategy with a target of at least 5-7 dealership acquisitions a year. The Company has historically acquired assets at ~2-3x EBITDA, creating immediate multiple arbitrage. Unlike traditional roll-up stories, (i) CWH does not rely on expensive equity currency, and (ii) significant value creation exists when CWH acquires a smaller competitor.

Following an acquisition of a dealership, CWH creates value through three areas: 1) lower cost inventory given enhanced scale; 2) lower floor plan financing and lease rates; and 3) cross-selling F&I products and services. Management has indicated to us that the average dealership is acquired with a 5% EBITDA margin, which on average increases to 7-8% within 24 months following an acquisition.

The acquisition of an RV dealership also immediately brings an additional set of customers into CWH’s database. In addition to cross-selling F&I products, acquisitions enable CWH to introduce customers to its P&S offering and Good Sam platform.

CWH’s 227 dealerships compares to its next largest competitor at 15 dealerships, leaving the Company with virtually zero competition as it sources and acquires targets.(22)

In a downturn, CWH benefits from the fact that most RV dealerships are mom-and-pop dealerships. As experienced in the last downturn, mom-and-pop owners experiencing a challenged personal economic condition are more likely to seek a sale of their dealership, and CWH is the only logical buyer. This dynamic enables CWH to more aggressively expand its scale at lower purchase multiples. In the last downturn, CWH purchased ~$1bn of revenue at inventory value.

Below is an example of the illustrative value creation based on $100mm of acquisition spend:

We have assumed that CWH pays 3x EBITDA to acquire assets, which suggests that the Company should earn a return in excess of 2x on acquisition capex.

3) Gander traffic is a transformative opportunity to scale RV business into new markets at an attractive ROI

Lemonis’ strategic plan consists of four-legs – 1) RVs; 2) Gander’s outdoor and hunting products; 3) Overton’s marine and fishing products; and 4) active sports, including hiking and biking products. With the acquisition of Gander, the vision was to leverage CWH’s engaged RV enthusiasts and Gander’s wide base of consumers interested in outdoor products to offer a wide variety of outdoor products under one roof, creating significant cross-selling opportunities for an overlapping set of customers.

A significant portion of Gander Mountain stores (40 / 75) will be refitted to include CWH RVs. The remaining stores are not expected to incorporate RV unit sales due to size and geographic restrictions. Instead, those stores will become co-branded with Camping World and sell RV parts, services and accessories. Conversely, management expects that 5-6 Camping World locations will add Gander Outdoors attachments.(23)

The strategy here is three-fold. First, CWH quickly acquires 40 RV dealerships, many in locations where acquisitions were difficult to source. These locations were acquired with no acquisition premium, instead just costing CWH the required pre-opening expenses and inventory.

Second, Gander generates ~2x the foot traffic that CWH does, and as a result, CWH has the opportunity to market RVs to an ideal set of consumers – those that have embraced the active / outdoors lifestyle, but have perhaps not yet considered an RV purchase.(24) And across Gander’s 75 locations, CWH is now able to meaningfully expand its cross-selling activities with the introduction of numerous new products.

Prior to its bankruptcy, Gander Mountain and Overton’s had 2.5mm unique Active Customers (as defined by CWH) which compares to CWH’s 3.8mm Active Customers. At announcement, CWH highlighted an expectation to add an incremental 0.7-1.5mm Active Customers, 0.7mm of which have been added to date(25). While not factored into our analysis, we believe that the cross-sell opportunity is material, i.e. selling fishing gear to a family that is purchasing an RV primarily to support a fishing hobby.