Description

MarineMax (HZO) is a retailer of boats, marine parts, and boat accessories.  They also provide boat financing, but this part of their business is too small to be an important part of the short story.  In addition, HZO has a boat brokerage business where they buy and sell used boats.  From 2004 to 2006, MarineMax grew from 67 stores to 88, and they haven’t added any new stores since the end of 2006.  Over 50% of revenue comes from Florida.

Unfortunately for MarineMax, the growth in stores did little to help the company.  While they added stores, revenue went up, but because they needed to stock the new stores, free cash flow has been negative in each of the last four years (FY ’07 not reported yet, but I’m making an educated guess).  In addition to stocking the new stores, HZO was cramming additional inventory into their existing stores.  Inventory per store went up by 29% over the past 3 years, and inventory growth has exceeded sales growth in 7 of the past 8 quarters.  The average store hasn’t been selling many more boats than they used to sell, but the average sale price went up by 30% ($89k to $116k) from 2004 to 2006 (’07 detail not out yet).  This is what would be expected in good economic times when credit is easy, but is not sustainable in the current environment.  It is important to note that these sales increases were not enough to produce positive free cash flow.  The outlook for the company is considerably worse now.

During the second half of fiscal 2007 (FYE 9/30), growth in sales per store turned negative while inventory kept rising.  Essentially, MarineMax bought too much 2007 inventory and couldn’t clear the sales lots.  As a result of this, they have reduced their purchases of 2008 inventory.  Gross margins which had been flat in the previous two years, were down 1.4% in ’07, and have been declining in each of the past four quarters.  Boat retailing is a very low margin business.  Last year, net margins were 1.6%.  MarineMax is overloaded with last year’s inventory, and they have very little room to cut pricing, and still be profitable.

On the most recent conference call, the CEO said that the current environment is the worst he’s seen in 30 years in the business. The company has been aggressive in lowering prices and marketing more.  Despite extending their big summer sale from 1 week to 2, they did not get the sales lift they got a year ago.  Inventory is still bloated going into their slow season, and they are annualizing 14% same store sales from 1Q ’07 this quarter so they are facing tough comps.  The company has very little room to increase marketing and decrease pricing, and still remain profitable.

Analysts are projecting $.73 for the fiscal year ended 9/08.  To get to that number, they are assuming flat gross profit.  Given that sales growth has already turned negative, and MarineMax is trying to move the same inventory they couldn’t sell last year, we think the probability is very low that they can match last year’s gross profit.  While this was previously mentioned, it bears repeating that over 50% of HZO revenue is from Florida.  We think there is a high probability of a significant miss, and that a 22 multiple on forward earnings does not indicate that a miss is in the current stock price.

Risks – Here’s what could happen to make us wrong:

-         While the average sale price in 2006 was $116k, the median price was much lower and was offset by a smaller number of very high ticket sales.  MarineMax does sell boats with $10MM - $12MM price tags, and it is a reasonable assumption that buyers of these boats do not need to qualify for financing.  If they get a large number of these huge-ticket sales, they could beat estimates.

-         Despite their inventory issues, MarineMax seems to be a decent operator.  It looks like they are taking share so it is possible that the overall boat business could decline, but that HZO could be ok.  Their recent results, and long term track record of negative free cash flow make this unlikely, but it is possible.

Catalyst