Description

Elevator Pitch

Trading at <2x trailing and forward EBITDA, with the potential for cash to represent ~60% of its market cap by the end of 2022 and a competent capital allocator now at the helm, I believe Lazydays Holdings, Inc. (“Lazydays,” “LAZY,” or the “Company”) represents a timely and compelling long. 

Background / Situation Overview

Lazydays is one of two publicly traded RV dealer alongside Camping World Holdings Inc. (“Camping World” or “CWH”) and the fourth largest RV dealer group (behind CWH as well as and privately held RV Retailer and Campers Inn RV). LAZY currently operates 15 dealerships plus a dedicated service center with three announced greenfield locations slated to open in 2022.

Compared to CWH, LAZY operates larger dealerships (including one of the country’s largest in Tampa) that index more towards higher price point motorhomes whereas ~90%+ of CWH sales are towable (i.e., non-motorized) that carry lower price points. CWH dealerships also tend to have a higher service / repair component. 

In December, Bill Murnane, who had been Chairman of Lazydays since 2009 when his former firm, Wayzata, acquired the Company out of bankruptcy and CEO since 2016, “resigned” from both positions. The resignation came shortly after Kanen Wealth Management delivered a letter to the Board calling for a new CEO. Chris Shakleton from Coliseum Capital (“Coliseum”) assumed the role of Chairman while Robert DeVincenzi, the recently installed Independent Director, became Interim CEO. Coliseum controls ~37% of LAZY voting power largely through its ~82% interest in the Convertible Preferred. 

LAZY’s shares have declined by 30% over the last six months compared to a 15% decline in CWH. Since LAZY has net cash, while CWH has some ~1x net leverage, the relative stock performance understates the relative change in TEV over that period. It is also worth noting that roughly ~25% of the CWH float is sold short (vs 8% for LAZY).

Why Does the Opportunity Exist?

• Size / Complexity / Limited Float: I will refer you to ci230’s October ’20 write up for background on the structure but LAZY is a former SPAC with a ~$350mm fully diluted market cap (assuming cashless exercise of outstanding options) where options, warrants and a convertible preferred nearly double the basic share account. As the preferred and warrants are closely held, the stock trades ~$3mm per day.

• Overearning / High Ticket, Discretionary Product: Similar to other discretionary products (e.g. boats), there seems to a general market sentiment that anyone who has wanted to purchase an RV has already done so. Similarly, as post COVID demand has outstripped the supply chain’s ability to deliver, dealers of all stripes (including LAZY and CWH) have generated higher than normal gross margins and gross profits per unit. 

• Frustration Over Historical Capital Allocation: I think the exchange below from the Q2 ’21 earnings call sums up investor sentiment around capital allocation: 

David Kanen (Kanen Wealth Management)

So if I understand correctly, if you can do acquisitions at a very high ROI, let's say, 3x, 3.5x EBITDA, even though mathematically, that's a higher multiple than your stock, you'll still do that? You'll ignore buying back your stock at a lower multiple and a higher ROI just because you can deploy at good levels on acquisitions? Is that what you're saying?

Bill Murnane (CEO)

No, that's not what I'm saying. What I'm saying is the Board is very disciplined in how we allocate capital. and we evaluate our use of capital in a way that we are deploying it towards our highest to get the highest return on that capital. That's what I'm saying. And we talk about that regularly with the Board. We're very focused on that.

David Kanen

Okay. I mean I just wasn't aware that you were able to deploy capital at 2, 2.3x EBITDA on acquisitions. My understanding was it a higher multiple. So it just seems like you're doing you're not going to buy back stock. You just want to do acquisitions even if it's more costly. And just a follow-up on that. One of your competitors is trading at a much higher multiple than you guys have run through the same math. They are probably 5, 5.2x, their pro forma EBITDA run rate and they're taking a balanced approach and buying back stock and investors seem to like that. So I just want to put that out there. Unfortunately, we are trading at almost a ridiculous multiple. And I think that, that may be one of the components that investors are contemplating and ultimately having a reluctance to buy our stock and pay up for it. 

Thesis

• Cycle Not Over Yet: Based on channel checks and industry commentary, I disagree with bears that the cycle is over as I expect the supply to remain challenged in 2022 while I expect demand to remain robust and therefore believe that LAZY (and CWH) have the ability to generate as much, if not slightly higher, EBITDA in 2022 than they did in 2021.  This is particularly meaningful for LAZY trading at ~2x ’21 EBITDA with a net cash balance since I believe LAZY could have ~55-60% of its current market cap in cash by the end of ’22.

Marcus Lemonis – CWH CEO 11/2/21

We will be providing our 2022 financial guidance early next year but, we are very optimistic that we will outperform 2021…And I think we're still surprised but encouraged, that first-time buyer halo that everybody thought would go away, just continues to be very, very solid…What we also know is, we're starting to see a nice uptick in our historical installed RV-ers, coming back to the marketplace to upgrade their units. The supply being constrained, a lot of it was gobbled up by the first-time buyers…So as we think about 2022, we're expecting positive increases in all revenue lines at this point and obviously positive increases on the bottom line

Thor Press Release 12/8/21

Demand in the North American RV market remains very high. Deliveries to independent dealers are being

retail sold quickly and dealer inventories remain at low levels in North America. We believe the restocking

cycle will still take a number of quarters to complete and could possibly extend into calendar 2023...

We anticipate that consumer demand will continue to exceed historical norms even after dealer inventories are restocked…The current supply chain constraints, including chassis shortages, continue to be a limiting factor on our ability to further ramp up production in the near term

Michael Happe - WGO CEO 12/17/21

The second category would be the motorhome category, that will happen later, than the towables category, the turns are higher currently. Production output is lower than on the towable side. And so that will be -- that will take longer

• Significant Multiple Discount: LAZY trades at a significant discount to CWH as well as other dealerships that sell discretionary product.

I should note that I believe LAZY deserves some multiple discount to CWH (FTR I am also long CWH) as CWH has a proven growth algorithm, greater power over vendors, a higher degree of earnings come from less cyclical sources (service, Good Sam) with a few lottery tickets (e.g. RVs.com) and therefore believe CWH is likely to deliver solid returns over the next 10 years. That being said, I think LAZY offers a more compelling near-term set-up.

• Coliseum / CEO Departure: Having cash is only useful if you have someone at the helm to competently allocate it. I believe with the clock ticking down on the warrants (more below) and the rest of the market throwing in the towel on Bill Murnane, that Coliseum realized it needed a new direction in terms of capital allocation and therefore a new CEO. Based on its most recent 13F (which excludes its Convertible Preferred position), I estimate that Lazydays represents a ~7-8% position for Coliseum. Given this and the persistent valuation gap to CWH and all other dealership peers, I believe Coliseum is highly incentivized to get this stock to work after LAZY has delivered subpar returns since the 2018 PIPE. It is worth noting that Coliseum has increased its position via open market purchases of the Stock in December at prices ~15% higher than LAZY’s current price.

• Warrants Expiration / Buyback: This sense of urgency should be heightened by the expiration of the PIPE warrants in March 2023. Coliseum is overweight the warrants relative to the common. Given this and the $98mm of cash LAZY has on its balance sheet, I expect LAZY will affect a large buyback to reduce share count, complexity and assuage market concerns around capital allocation.

• Attractive Normalized Unit Economics: LAZY generates attractive unit economics that requires little upfront investment in store (see greenfield economics below). Furthermore, I estimate that at least a third of SG&A is actually variable in the form of commissions (generally ~20% of new / used gross unit gross profits). 

Bill Murnane on Q3 2021 Earnings Call

We commenced operations in Nashville in January of this year or just 10 months ago. One of our REIT partners funded 100% of the land development for the Nashville dealership in return for Lazydays signing a long-term lease on the property. So we did not have to use any of our cash to develop the Nashville dealership property. We use REIT partners with acquired or greenfield dealership properties Because the return we can get on newer acquire dealership operations is far superior to the returns we get on real estate. The returns we get on newer acquired dealership operations are well north of 50%. And real estate returns are in the low to mid-teens depending on leverage. So we prefer to allocate our capital towards new dealership operations.

Our floor plan lenders fund most of our inventory investment in new dealerships, so procuring inventory doesn't require much of our cash either. Our only real cash outlay for greenfield is some small startup costs related to working capital, advisor fees, and a month or two of negative operating cash flow. We conservatively estimate our startup cash investment to be $500,000. Although, Nashville was much lower than this amount. In Nashville, we were profitable in January; our very first month of operation, so there wasn't much negative operating cash flow in Nashville. Nashville today 10 months later has annualized revenue well above $50 million and has a market share above 20%.

We believe Nashville will ultimately be $100 million dealership. In addition, annualized EBITDA on Nashville is currently well north of $5 million. So you can see that the cash on cash payback in Nashville was measured in weeks or maybe a month. And the ROI on Nashville is far above 50%. We believe we can get returns similar to Nashville on all greenfield dealership projects.

What is LAZY Worth?

If the Company can use the bulk of its cash to reduce share count, even with ‘mid-cycle’ earnings, I believe LAZY can generate ~$5 / share in free cash flow even while running effectively zero net debt. Given this, I believe LAZY is conservatively worth 4.5x mid-cycle EBITDA or ~$50 / share, which translates to a ~10% FCF yield and would generate at three bagger for investors.

Risks

Capital Allocation

Economy craters in 2022

NWC unwind

Catalyst

Buyback

2022 Guidance at or above 2021 Earnings

Sale of the Business