Q3 2022 Camping World Holdings Inc Earnings Call
Good morning, and welcome to Camping World Holdings Conference call to discuss financial results for the third quarter of fiscal year 'twenty two.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will follow at that time.
Please be advised that this call is being recorded and the reproduction of this call in whole.
It is not permitted without written authorization from the company.
Participating in the call today are Mark Cook pneumonia, Chairman and Chief Executive Officer, Brent Moody President.
Erinn Bell Chief Financial Officer, Tamara Ward, Chief operating officer.
Massive Wagner executive Vice President Clinton Christie Christian.
Cause that could've, Vice President and General Counsel, Tom Karam, Chief Accounting Officer, and Brett Andress.
<unk> Vice President Investor Relations.
Turning to call over to Chris.
Got it.
Thank you and good morning, everyone. A press release covering the company's third quarter 2022 financial results was issued yesterday afternoon, and a copy of that press release can be found in the Investor Relations section on the company's website.
Management's remarks on this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These remarks may include statements regarding the impact of COVID-19 on our business financial results and financial condition, our business goals plans abilities.
And opportunities.
Industry and customer trends, our recently disclosed cyber security incident.
The expected impact of inflation and market conditions, our strategic initiatives acquisition, SG&A expenses and capital expenditures potential stock repurchases future dividend payments.
Increases in our borrowings our liquidity and future compliance with our financial covenants and anticipated future performance.
Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in the risk factors section in our Form 10-K, our form 10, Qs and other reports on file with the SEC.
Any forward looking statements represent our views only as of today and we are.
Under takes no obligation to update them.
Please also note that we will be referring to certain non-GAAP financial measures on today's call such as EBITDA adjusted EBITDA.
Adjusted earnings per share diluted which we believe may be important to investors to assess our operating performance.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial statements.
In our earnings release and on our website.
All comparisons of our 'twenty to 'twenty two third quarter results are made against the 2021 third quarter results unless otherwise noted I'll now turn the call over to Markus Thanks Lindsay.
And thanks for joining us for camping world's 2022 third quarter earnings call.
On today's call, we're going to lay out our financial results along with providing some insight into the remainder of this year.
And 2023.
As a company we continue to experience healthy demand, resulting in our company generating revenue for the quarter, just shy of $1.9 billion.
During the quarter, we sold over 32000 Rvs just under the record we set last year with the big driver being a record used unit sales of 14460 units up over 6% compared to the third quarter last year.
We have seen recent demand stay comparatively strong for this time of year with use RV setting the pace during the third quarter as a result of growing installed base of our viewers and evidenced by our results. We continue to see both stability and growth in our service business, Good Sam segment and our <unk>.
He used business.
As you'll hear today, we feel very strongly that these key areas of our business and further investments to them will help us to intelligently and profitably outperform the market over the next 12 to 24 months and beyond.
One of the key things I want investors on this call to focus on is the success, we're having in driving the use side of our business in the face of short term pressure on the new side.
Our goal of achieving used sales of $3 billion annually has substantial momentum.
For the quarter a record used unit sales delivered over a half a billion dollars of revenue up over a year ago.
Putting us at 1.9 billion on a trailing 12 month basis, more importantly, $400 million higher than the trailing 12 month figure from a year ago.
So as we talked about on our last call. Our used margins landed in the range that we told people down less than 150 basis points compared to Q2.
The reason we feel so strongly about this shift into used is because we now have more evidence from our results.
Simply stated the gross margin return on investment is higher than that and the turns are faster.
Furthermore, each transaction contributes to the profitability of our overall business, including service replacement in aftermarket parts as well as our good Sam finance and finance products.
We know that the used business is a game of scale it.
It requires capital proprietary technology like the good Sam RV evaluate or tool and a very strong and healthy database to both buy from and sell too weak.
We possess all of them.
Much like the new side of the business. The supply chain is key to success, our highly disciplined approach to procurement reconditioning pricing and marketing are key.
Stringent approach to stocking levels turns and aging matter more we expect to maintain that discipline.
Since we last talked in August we ramped up our procurement of used inventory launching the good Sam confidence program.
Our new consumer facing strategy to offer a current RV owner, a no hassle process with full disclosure around their value regardless of whether they are selling the unit outright are trading at infrared another.
The early results are fantastic.
And the first 50 day period. This has resulted in us procuring over 6000 units.
More importantly, we sold more than that in the same period wed.
We love to use category, because it's not only a great gross agent because but we also see it as a hedge.
In the last 12 months nearly 900000 used units change hands.
That's almost double what happens on the new side.
The opportunity for us is clear.
With all the success, we're seeing in used it is absolutely still our plan to remain the market leader in the sale of new Rvs in fact for the quarter, we retailed in excess of 17600, new units with a gross profit margin of 19, 1%.
A decline of only 180 basis points compared to the second quarter of this year.
The key topic on the new side, and there's quite frankly inventory management and the key metric inside of that is that we look at the total number of new units by location.
Today, we're stocking around 182 units per location down compared to the Q3 historical average of 208 units when you use 2016 through 2019.
As always our inventory levels in Q4, and Q1 ramp up in preparation for the selling season, we will continue to tightly control this number and aim to yield more with less.
As the size of the installed base of RV years continues to grow like it has for the last four decades, it's clear that our products services and other business also known as our service and parts business continues to be a steady and predictable growth engine for our company.
That business generated $269 million of revenue for the quarter and we ended the quarter with 2639 days and over <unk> 300 service technicians.
An additional benefit of both the growth of our viewers in America, along with the growth of our own database is the continued growth of our good Sam business.
For the quarter, good Sam generated revenue of $54 million, an increase of eight 1%.
When we jump into the financial summary for the quarter. Our adjusted EBITDA was $173 4 million our gross profit for the quarter was almost 595 million a 32% margin slot.
Slightly down from last year, as we discussed but it was still nicely above our historical average of 27 five that we experienced between 2016 and 2019.
Our tight control of SG&A and capital expenditures is a key component of our management philosophy.
Our management team is not naive to the current macroeconomic environment and we are currently making the hard choices on what to shed.
Where to deploy our capital we have and will continue to significantly reduce our marketing obligations eliminate underperforming assets.
Pause on certain initiatives and reduce head count.
Well, we're making tough decisions. Our plan is to continue to focus on funding our major growth drivers and our dividend.
Our plan is to deploy our capital in the foreseeable future in this way.
Our used our service and parts business, our good Sam business and opportunistic acquisitions.
We ended the period with $148 million of cash on our balance sheet, plus an additional $219 million of cash in our floor plan offset account.
In addition, we have about $426 million of used inventory and $294 million of parts inventory.
Lastly, we also have about $278 million of real estate without an associated mortgage.
As expected our business is returning to its historical seasonal patterns. When we look at the normal pre pandemic progression of sales from the third quarter to the fourth quarter revenue typically declines by about one third and adjusted EBITDA margins historically are right around the low to mid <unk>.
Single digit range.
In closing as we head into 2023, we're focused on where our business is going with that we're planning our SG&A capex and capital allocation based on industry conditions that might be lower than some of the projections ive seen in the marketplace.
If we're wrong and it'll be the best time to be wrong, and therefore, right will be well positioned to intelligently and profitably continue to outperform the market.
We believe that camping world has a unique and special business because it ultimately serves the growing installed base of rvs, and that's evidenced by the stability and our growth in our us business, our service and parts business and our good Sam business.
Now I'll turn the call back over to the operator for questions.
Thank you.
Well now be conducting a question and answer session. If you'd like to ask quick question. Please press one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
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Because equipment it may be necessary to pick up your handset before pressing the star key one moment. Please while we poll for questions.
Okay.
Our first question comes from Mike Swartz with <unk> Securities. Please go ahead.
Hey, Yeah, good morning, everyone.
Marcus I just wanted to kind of add onto your comments that you just made on planning for the industry to be maybe worse than what some of the numbers you're hearing out there and I think pretty broadly.
The consensus view is maybe retail at closer to 400000 units.
2023, and if we go back I think the industry was round right around that level in 2016.
Question being as you know.
Is your 2016 earnings level, the right way to think about earnings.
If we see a 400000 unit number I mean, obviously you've added about 80 doors since that time. So there is some M&A pick up but just maybe any sense or any parameters you can give us how to think about earnings in that scenario.
While our business is materially different than it was in 2016, it's it's almost double the size.
And a lot of parts of our business have grown nicely I think what I like to always compare it to as we go into these headwinds is a lot of people have been talking about what 2019 was like when the industry was under a lot of pressure because the manufacturers had overbuilt margins came screaming down and for us.
That was really a lot of lessons learned when I look at the 2019 results. We recognize that there was too big errors in my decision, making at that moment in time. The first was we had launched an initiative in a segment of our business that wasn't our core business and when we look at shedding.
That and all the associated expenses that we don't have today that we had back in 2019, our SG&A is about $150 million lower on a comparative basis I think additionally, when we deployed our capital in certain categories that weren't turning fast that weren't giving us the <unk>.
Margin profile, we wanted and we then exited all of those categories and shifted into our current makeup mix that's about $100 million of gross and so if I was pro forming 2019, I'd have about a $250 million adjustment up from where that low watermark.
In addition to that I think we also learned that this business is fast when it sticks to its absolute core strike zone.
Selling servicing financing and all the associated products related to exclusively rvs and when we look at anytime we go into a headwind period and I've been doing this for 20 years you have to contract your SG&A contracts your head count contract all of your initiatives and get.
Hyper focused on primarily three categories the used business because of the margin profile and its uniqueness in the marketplace. The service business. Because there is over 11 5 million RV is already in the marketplace and growing and our good Sam business because it services that that doesn't mean that.
We're going to be out of the new business. It just acknowledges that the new business is under pressure.
So looking at 2016 isn't necessarily fair, but I do believe for our own planning purposes, and we are not forecasters of any industry. We just happened to see more consumers than anybody else in the industry I really do believe that it's prudent for our company to reduce.
<unk> head count Kantar.
Control its cash and its SG&A and its capex as if theres a possibility of the shipment data going down not from $400, which is what I've seen published but it could go down as low as $3 60 to $3 70, if I'm wrong, great, but I'm not going to allow this business to have any excess.
Waste any excess head count any excess SG&A or any new initiatives. During this period because my job is to protect the investors from any downside that I, possibly can and to put our capital where we think we're going to get the greatest return.
Yeah.
Okay that was extremely helpful. I appreciate that markets and then just maybe I think you made the comment in your opening.
In your opening commentary that demand has held up comparatively strong for this time of year. So maybe just maybe in the context of like the cadence of the quarter and what you've seen in October any any color you can provide there around around those specific comments, yeah. Its really kind of a crazy when I look at the last four months and I include October .
August and September were relatively decent we were starting to feel the margin pressure in the middle of the quarter and we obviously wanted to react that's partially the reason that in our opinion, we outperformed their retail registration data that was out there in the market I think we were down six or seven for the quarter on the new side and some.
Data that I've seen may be as high as 25 or 26%. So when you look at SG&A and you look at margin, we spent a little bit more to keep that volume we are going because of the overall lifetime value of that transaction and our margins came down a little bit as we discussed we saw September come and R V.
<unk> fell irregularly compared to what we had seen it fell off pretty hard.
Paired to August and September excuse me to July and August then we got into October and our volume came back now I don't want to attribute that to the hurricane or anything like that because we are definitely we'll never use weather as a forecaster what I'll attribute it to is there continues to be pressure in the marketplace and we had to pivot.
And oftentimes when we spend marketing money in a month there is a slight delayed reaction to yielding that revenue, it's not like the grocery store, where we advertise tomatoes today and somebody comes in there is about a 17 day lag period between us marketing something getting a lead in that transaction.
Happening that's probably why we saw relatively flat sales in October , but we experienced a slight bit more margin compression than we had in the third quarter and we typically do in the fourth quarter. If you go back and look at history. The fourth quarter is always about one third less volume.
Then the third quarter and the margins over all the years that I've been doing this always come down in the fourth quarter. They may come down for us a little bit more because we're so stringent around our inventory discipline that when we get into the fourth quarter anything that has anything growing on it if its over 180 <unk>.
As we start to liquidate at a more rapid pace, because we don't want to carry it through the winter, which is obviously the slowest period. As you think about November December January February those are the four toughest months for the recreational business not just our business and over the last couple of years, we've kind of been.
<unk>.
Repeat that a little bit I think we're starting to see those traditional seasonal trend lines come back into play which is why in the prepared remarks, I talked about revenue coming down about a third from the third quarter and then the SG&A comes down on the variable side, but there are some fixed costs still in there which is why the.
EBITDA margin comes back down to historical levels as well.
Okay Super helpful. Thanks, a lot guys yep.
Yeah.
Next question comes from Joe I'll come back a little ways away.
James Please go ahead.
Thanks, Hey, guys. Good morning, I guess first question markets would love to get your thoughts on the promotional environment. Obviously, you haven't seen much in the way of <unk>.
Promotional or discounting over the last two or three years and it seems like the expectation is that we'll get back to you with 2019 levels in terms of promotion. So I guess the first question is is.
Is that your outlook or could we see even even heavier promotional activity versus three years ago.
We're budgeting for something better than what happened in 2019, because there was an excess supply of new inventory in the channel that even evidenced by our current same store sale unit stocking declined over historical levels. So we don't think we're going to see that level of pressure, but we.
Are going to see pressure compared to what we've seen in the last 12 months and I think the manufacturers.
Probably because we started to call. This out last February they started to pull back on their production and we don't believe that there is a heavy glut of inventory in the channel today now the manufacturers and dealers have to stay disciplined through this next what I'm going to call. It six to seven months.
Because there are headwinds that are coming at us at a pretty rapid pace and I think the only way profitability maintains itself at a level that we wanted to is very tight inventory control both on the buy side and the sell side and a very robust focus on used because of the margin profile there but.
We are expecting there to continue to be slight pressure, but I want to be clear. We don't expect at this point unless some new information comes out that we're going to see margins look like they did when everybody was on a fire sale in 2019.
Got it that's very helpful. And then just a follow up on that maybe if you could give us an update on some of the progress that you've made on somebody recently initiatives like like Peter Your RV rentals for example, your service marketplace et cetera.
Well I'm.
Please that we launch those initiatives over the last couple of years, we've made the decision to almost virtually cut back all spending on any initiatives other than our core business. We just decided that at this point, our investors expect us to lock everything up reduce SG&A at a very rapid pace.
Unfortunately, reduce head count and we can't in good conscience reduce head count and continue to spend on ideas. While those ideas are good they will be there for another day today, it's used service good Sam business and a lockdown of SG&A.
Got it thank you.
Okay.
Next question comes from Danielle Enbrel Pizza.
Please go ahead.
Hey, good morning, Markus Thanks, Larry for the question.
I wanted to start on the revenue line and you know I think last quarter. You said you expected same store counted up 15 to 18 in the back half obviously, you outperformed that on both new and used I guess, what drove that was it just a stronger consumer than you expected was it better inventory control and I'm guessing that's not the right level for the back half now. So can you help us frame up what you would expect same sort of decline.
For the rest of this year, given what you're seeing I think you said October was flat.
Yes, we believe that our proprietary database along with the way we market along with our pricing strategy. Our lead based pricing strategy is what drove some of our results. In addition to that we spent about $5 million to $6 million probably.
More than anticipated on generating activity for that revenue to be generated and when we look at the overall long term health of our business more transactions and more unique customers in our database gives us greater lifetime value of our customers and the best acquisition point.
For lifetime value of a customer a good Sam member is the sale of a new or used RV. It feeds our service business, our parts business and our good Sam business and we made the decision internally as we went through the quarter to continue to invest in the flywheel and we understand that our SG&A was higher than.
Anticipated, we acknowledged that we needed to make some cuts in those started in the third quarter, but what we don't want to do is stop the momentum of our flywheel now as we go into the fourth quarter and the first quarter, we're going to be pulling that back pretty pretty heavily but we will not.
Do that at the expense of breaking our flywheel, because we know that the long term value created in those transactions yields us income in 'twenty three 'twenty four and beyond as we prepare for the fourth quarter and we prepare for the first quarter I'm going to stick to my narrative of down 15.
To 18% and I know that I've said that three quarters in a row and we've outperformed it but I'd rather show up and have people be pleased with our outperformance than pleased with our then disappointed with our over optimism in the face of a macro environment that everybody can see so I'm going to stick to down 15.
To 18% I'm going to tell you that I believe that our new and used margins in the fourth quarter are going to experience a normal seasonal fourth quarter compression and our SG&A. Just so we can get it out on the table historically was always materially higher than the second and third quarter because.
It's our shoulder season.
What we don't want to do is have people think two things one that the fourth quarter that we experienced in 2020. One is normal I remember for many years, we never made money in the fourth quarter.
And we started to make money in the fourth quarter, because we started to control our cost and generate some revenue. So we are very focused on that but to project revenue deep into 'twenty three I think would be dangerous at this point for all of us.
No that's really helpful helpful color.
If I think back on the investment you kind of listed before bucket of use there are good things for the fourth one is M&A and it feels like you guys have historically lean into that during downturn. I'm curious are you seeing more sellers come to the table kind of where our multiples in the M&A side.
As we look at the public stock multiple and how you weigh the decision between buybacks or or M&A would love to hear any updated thoughts you have on the image at all.
We're always conflicted when we look at the low valuations that are being assigned to our company. When we know the intrinsic value of our company is higher so we're always conflicted but our primary objective in this company has been and will continue to be from 2016. When we went public for the foreseeable future is that we are.
Opportunistic acquire of RV dealerships because it is the baseline. It is the foundation of everything else in our company. We have started to see a pickup in people wanting to talk about selling their business and I can tell you with absolute conviction that those multiples have come down.
Those expectations have come down what we are doing in our company today is building cash as evidenced by all the working capital that we talked to you about and getting ready to be opportunistic getting ready to be opportunistic we have not we do not at this point in time as we sit here today.
Has anything materially signed that we're prepared to disclose but I can tell you that when we went public we told the marketplace. One thing we like a downturn for two reasons, we get better at managing our business, we tightened up our SG&A, we improve our processes and our efficiencies and we buy.
Buy a ton of revenue at a very low to no multiple and when that hockey stick turns and it always does we ended up experiencing revenue and earnings that we essentially paid nothing for we buy inventory, we buy real estate and in some cases, we pay a little scratch of goodwill, but nothing like.
We pay in the good times and we are the best at buying those types of businesses, because our processes and our systems go into what we would call distressed or troubled businesses and we yield an unbelievable return on capital.
Yes, it makes a lot of sense. Thanks, so much for the color markets and best of luck.
Thank you.
Yeah.
Next question comes from Craig Kennison with Baird. Please go ahead.
Hey, good morning, Thanks for taking my question on marketing you talked about the us business being a scale business and I certainly appreciate that and then you talked about one node in that process being reconditioning.
Process I'm just curious if you could just comment on that.
Scale, you have in that particular function and maybe what it cost to recondition the average unit.
I have Matt take that Craig and morning, Craig Great question. When we think about the scale of that March was alluding to in his opening commentary, it's more in reference to our ability to actually source used better than any other entity out there and I would say that in so much as part of my apprehension over the years of getting involved more than us as the <unk>.
<unk> associated with that supply chain.
I'd like to thank based upon all of our proprietary technology the experience that we've amassed over the years of how our consumers behave in the trade in cycles, and our ability to actually drive down that cost associated with the lead to procure used unit I can tell you right now we're averaging about 2000 leads per day.
To buy used units. So if you extrapolate that out that's in excess of 700000 used units that we could potentially buy on an annualized basis and I can tell you no one else out there had the access the amount of capital information that we do to be able to procure these assets at a severely reduced value compared to all.
All of our competitors out there when you asked about recondition. That's another great question. So I can tell you that's been one top of mind as we're trying to figure out in terms of our capacity between our external work versus our internal work and what's the best methodology for us to optimize every single transaction every single reconditioning effort, while at the same time insurer.
Bring that we could put our brand behind these used assets that we're selling to these consumers on average you know we're gonna have ranged anywhere from 5% to 10% on reconditioning for those assets that we want to actually recondition I say that because we also acknowledge that there are certain multi years certain age of units, where frankly, it's just not worth reconditioning.
So in our minds, we're continuing to get better and better in terms of parsing out the different ways that we approach us we're continuing to learn every day and I'm really confident in the long term outlook of what we should be able to accomplish here over the next year.
Thanks, and as a follow up is there a sweet spot for you in the used market, whether it's the age of the unit.
The model.
<unk> brand are you able to to be successful in a pretty broad range of used product.
Honestly, that's where we've been able to fine tune our methodology to such an extent when we were able to optimize that gross margin return on investment because we know exactly which model years are going to yield the most lucrative return for us as an enterprise. So I'll give you the generalized range, but we know within there there are certain segments certain floor plan certain brands.
Generally speaking about 2016 to 2020 model years as that general range of re oftentimes target understanding that that consumer will have even a higher likelihood of remaining within the lifestyle too thereafter, so hopefully it turns into a trade or frankly, we could purchase it at a significant opportunity that arbitrage, where other other competitors simply just don't see.
See that and we could see that opportunity Craig to mats credit.
Secret sauce is the <unk>.
Secret sauce in the value added tool that Matt Bill has multiple layers inside of it and it's kind of an evolving process and so when you go in the 2014 owner you're going to go through a different experience than you would as a 2017 owner and the values are.
That are ascribed to specific units do vary and part of the reason why Mac doesn't just wanted to disclose all of it is because it is part of our secret sauce, but it's all the way down to values fluctuate up or down based on model year based on floor plan based on make based on model and more importantly, based on our own experience.
We're selling all of these units over a decade and so as we've seen this growth in our used inventory and we will continue to see growth in our used inventory is in some haphazard walking around thing and I want to address something that you've also asked me in the past around the values of used the value waiter is.
A daily dynamic.
Our formula and what that means is every single day those values are coming up and down like they would for the commodities market for corn are for oil or for whatever it may be it's based on demand. It's based on time of year and so when we buy something today, we may have paid materially less than we did yesterday as aside to.
That when you look at our current inventory position, which everybody should be thinking about it is important for people to know that we have the strictest adherence to an aging policy and so if there is a change in values in the marketplace. We turned our inventory so quickly that we rarely get.
Caught flat footed that does not mean that we don't make mistakes that does not mean, there arent cases, where we put too much reconditioning into it and when we get to the fourth quarter. That's usually when we kind of flushed the toilet on a few things we have for years, but I want investors to be very comfortable that there is an acute.
Science to managing their capital Thats deployed into used inventory very strictly and how we buy things. It's not just by as much as you can for as much as you want to pay for it it doesn't function that way.
That's helpful. Thank you.
Next question comes from John Healy with Northcoast.
Okay.
Go ahead.
Thank you just wanted to ask a couple of questions kind of on the financing side, what would just love to get some perspective on what Youre seeing there.
Obviously, you're outperforming the industry, but would just love to understand the sales process has it been how it's become more.
Long dated and what Youre seeing on the cost of financing for these consumers as they're coming into to shop for a unit.
Well the process.
By quite frankly, with our company's relatively easy we prequalify. Many many people before they even come in but when they come in our finance process is very very stringent.
And has a very tight process to it but we haven't seen at this point any change in lenders willingness to lend credit out there we've seen no headwinds of any kind I think thats, primarily because the RV consumer typically is a better credit profile customer historically.
Then the auto customer it's an average 700 credit score household income over $100000. It's a different type of buyer and when you look at the delinquencies that lenders experienced even back in <unk>. It was a small small fraction of what the auto business went through so that's number one I think the second thing is we learn.
And over the last 10 years that having fewer banking partners, making credit available to our customers would yield us a better result, and when a bank is going to make an exception or stretch on a particular customer they do it with us because the overall portfolio that we give them is very rounded out and.
Just as opposed to us having a finance office, where Theres 30 banks, we may have one where theres five or six and a local credit union that type of process took us a decade to refine and that could be one of the reasons why we're potentially outperforming on the new side because of that type process.
On the finance side, and our relationships with partners, it's a much easier to service our accounts and if and whenever it happens something goes bad on alone we have that built in relationship where they can sell it to us are consigned to us on the used side and help that customer or bank recover whatever losses. They may have experienced.
Super helpful.
Another question wanted to ask was just any color on what's going on in the state of Florida, I mean, obviously.
A big market for you guys are you expecting any sort of kind of government purchases kind of on rovs as we close out the year or any sort of view on how supply was may be impacted in the market.
Well, obviously, we're all terribly devastated by what happened, particularly in South Florida I was visited all of our South Florida stores over the last 10 days and the demand is strong it's unfortunate that the demand is strong for the reason that it's strong we expect that demand to continue here in the fall.
Seeable future and I think the one advantage we have as a company is our ability to mobilize inventory from the entire southeast U S and continue to feed those locations on a regular basis as it relates to governmental acquisitions of inventory, we're not seeing much FEMA activity, we have heard about <unk>.
Activity inside the state of Florida issued by the state of Florida, but at this point, we are putting bids in through the process, but we're focused on the general consumer who is showing up with insurance checks and in some cases showing up with no home at all and just trains that are transacting at a normal process. So.
We're not expecting any big bulk sale in the fourth quarter and obviously if that happens, we'll let everybody know.
Great. Thank you so much.
Next question comes from Ryan Brinkman.
With men.
Martin Please go ahead.
Hi, Thanks for taking my questions I wanted to ask about where you think the industry overall may be in terms of <unk>.
RV inventories on dealer lots that I know you've been disciplined on new unit stock turn and aging as you ramp your focus on the used side, but do you have a sense for where your competitors, maybe with regard to new inventory and whats. The latest in terms of your thinking regarding the balance of supply and demand for new units and the implications for <unk>.
<unk> be a retail gross margin.
I don't ever like to forecast what other RV dealers are doing I think that's a dangerous thing because we're not we're not forecasters of other people's businesses.
But I do believe that other dealers and manufacturers have displayed a level of discipline that to be candid with you I haven't seen it.
In my 20 years of being in this business. It was maybe it was because we raised the flag early in February maybe because everybody realizes that margin protection is a function of inventory discipline. That's what we believe there are going to be some dealers that arent going to be able to compete in this environment. They don't have the digital.
Strategy. They don't have the database and theyre not going to be able to enjoy it and so it's possible that in certain pockets in certain markets dealers may become far more.
Undisciplined about their own pricing strategy, but as the industry continues to consolidate with other large retailers like us there is a sophistication that exists today that maybe didn't exist three or four years ago 10 years ago, and Theres, a sophistication that exists on the manufacturing side that I don't believe exist.
Four or five years ago, or 10 years ago I do believe however that we're all capitalists and retailers at heart and when we want to create transactions or generate revenue. We know that the easiest way to do that is to incentivize the customer to do something and so I expect that promotional activity.
Margins will fluctuate here over the next 456 months as the headwinds exist. That's just good business to move your inventory I think what everybody has to recognize is that this industry has always had these small little spotty cycles, but the one thing that everybody should remember.
That history has taught me in my in my in my whole channel is that the business always comes back and so while dramatically, reducing SG&A, which everybody will do and dramatically reducing inventory levels and dramatically reducing marketing happens it happens.
For a short period of time, so to summarize I expect there to be some more promotional activity, while the headwinds pick up I expect there to be more marketing, while the headwinds pick up and then it will normalize very shortly after that.
Okay, great. Thanks, that's encouraging and then.
What do you think the latest is in terms of the consumer you know of course interest rates asset prices sentiment that may impact, new and used units, but what about like gas prices and whatnot for participation in the lifestyle such as miles driven are trips taken and are these anecdotally of course I don't think that that are really access, but you know.
How do you think.
Demand at your retail store for like the consumables and sundries in collision and service is likely to track.
You know through twenty-three et cetera, even if we have one of those.
Downside $3 60, or so new unit forecast that you threw out there when we look at the downside 360000 shipment forecast in our own model not anybody else's, we still feel very comfortable that people are people that are already in the lifestyle and let me clarify for <unk>.
40 years.
For 40 years, the installed base of RV years has always gone up and there are certain years, where it goes up more than others.
But for 40 years, it has always gone up and our company. The reason we believe it's special because it largely focuses on that installed base, which is why our service business is good which is why our used business is good which is why our good Sam business is good.
What I believe sometimes happens is there's a slight pause with new entrants coming into the market slight pause that's what creates the drop off from $460000 to 360000, and while 100 thousands a lot it's not a lot across 330 million people well.
What we have to do as an industry, which I think we've done as a company is to be able to have a cost structure. He can move in and out of that and to accept that they were going to be trough years, and there are going to be peak years, but when you look at the average of earnings than the average of CAGR growth over a five year period, the cash flow in there.
Returns on capital are phenomenal I think that applies for the manufacturers I know that applies for our business.
Okay. Thanks, and then last question I heard you say that youre being more selective with the allocation of capital locking down SG&A to focus on the core business et cetera, and I'm, sorry, if I missed it but how does that translate to.
The RV sharing initiative, which is clearly in an investment mode, but I recall you were interested in this business not just for maybe longer term profit potential of renting or brokering. The renting of rfps, but also because of the synergy potential with the core business, including used RV acquisition et cetera. So is.
Investment in RV sharing still a priority.
Investment in anything at this point that doesn't yield us a super margin in a super return like our used our service and our good Sam business will be paused has been paused.
That doesn't mean that we're abandoning the idea that doesn't mean that we're not going to revive it at some point, but when I look at the total amount of capital available in our company, we need to get down to brass tacks and that is making sure that we're keeping our employees healthy and safe and stable because they are the most important.
Assets in our company, we have to look at their benefits to make sure of their pay is in line with the market. We have to make sure. Our inventory is solid that our lenders and our debts are being satisfied we have to make sure that our dividend is being paid on a regular basis and we have to make sure that we have stockpiled enough cash to make opportunistic acquisitions.
I want to make it more finite than that.
In a given 12 month period, we were going to invest $4 million into any initiative of any kind RV share whatever it may be I would rather hold those $4 million and wait for a location in a white space market to open up and buy that land and pick up $15 million of revenue.
And $1 million of earnings when the market turns because the return on capital for that $4 million is better than any $4 million that I could spend.
Okay got it thanks for all the color.
Next question comes from Brandon <unk> with D. A.
Hey, Dave.
Please go ahead.
Thank you for taking my questions first just on your mix.
This quarter you were 50 545, new to US I know you wanted to get a closer to a 50 50 balance do you feel like you would reach that balance next year and is there a chance moving forward, maybe tilting in favor of us.
The future.
It's most important to me that we maintained our number one ranking as the new RV retailer in America, and I'm going to hold on to that until the day I die.
Getting to a 50 50 used goal is the goal and really what it does is it forces us to focus more on us, but we would never ever want to cannibalize or destroy our new business to achieve another goal. We would want to continue to grow our new business and grow our used business because we.
We believe the addressable market for used is double that of the new market.
The size of new Rvs shipped out of the marketplace last year was 400 and some odd thousand.
The number of used transactions in used units have traded hands was 900000, we have to improve our market share market by market on the used side, but not at the expense of our new business at the benefit of growing our youth business and so I don't ever want anybody to think that we're trying to get to 50 50.
Suppressing one and lifting up the other if we get to 50 50, it's going to mean that we continue to kick <expletive> on the new side and we've really dialed in the used business not that we've gotten away from the new business.
Okay, Great and then just on affordability it seems like average selling prices for new vehicles continued to trend higher obviously, we're in a higher interest rate environment. How do you feel about affordability moving forward and maybe where pricing goes over the next 12 months.
So part of the reason why we made this very strategic shift into use in the third quarter of last year is when we exited all of those non core RV categories from the outdoor space, we took that capital and we started to put it into our used business because we noticed that there was a return but the reason we did that is because we were starting to feel the pressure.
<unk> that the consumer would feel around the increases on new pricing and in order to maintain dominance in the marketplace, we needed to give and we will continue to give the consumer an alternative if you can buy a like asset that's one or two years older and a higher interest rate environment, you can offset that payment.
By selling them a unit at 2356 $7000 less than the new unit would have been we believe that the new manufacturers are doing a hell of a job trying to control costs that they're receiving from their own vendors trying not to pass on incremental expenses to us, but we also see.
Their filings and their margins and so we're not naive to the fact that their margins actually expanded.
As the largest retailer of new Rvs in America in an uncontrolled unregulated industry. We will continue to not pay the same as a single point dealer because thats the largest customer we expect to get the best deal we expect to pass those savings on to both our customer and our bottom line.
<unk>.
Great and just one last question.
Given.
Focus on used vehicles, how do you feel about your new vehicle inventories right now and.
Are they where you wanted to be or do you feel like you know you're a little under inventoried over inventory.
As we mentioned I think we're sitting at about 100 and was it 90 182 units per location, new underground Thats down from about 200, right. So it's down from over 200 to be candid with you I think Matt who is the absolute genius architect of what our inventory.
Strategy has been would probably want it to be five or six units less this time of year and so in the fourth quarter. We have this really tough challenge of preparing for the selling season, where inventory is going to go up but we want to maybe try to widen the gap between what we historically had before the pandemic.
A number of new units per location and where we are today. So are we may be a couple 1000 units overstock today from where we'd love to be sure are we going to burn them and just take this absolutely no margin approach no we'll be smart about what we buy and what we reorder, but we are not over inventoried even by a little.
Yeah.
Great. Thank you.
Next question comes from Tristan Thomas with BMO.
Capital markets. Please go ahead.
Good morning, everyone.
Good morning.
Just one question I think you'd called out you're getting 2000 news. We today do you have any data behind our these are viewers, who are buying a new RV or maybe another used or perhaps leaving a lifestyle, but do something else.
Okay.
Almost impossible to always discern exactly what the motivation is for every single customer, but I can tell you in math when you look at our ability to source used assets. These are customers that are oftentimes depending upon the season looking to either re enter the lifestyle as they're heading into next year. So for example, if an app.
Asset or a consumer comes to us in August September we can reasonably conclude that that same customer just doesn't want to incur the cost and expense with storage and as such they come to us to actually buy that asset from US and then maybe reentering. The lifestyle by March April next year, Theres always going to be some consumers that just choose to exit the lifestyle hopefully for.
Short time, because we see a lot of re entrance into the lifestyle on a consistent basis.
So most are going to be attracted oftentimes in their childhood or their kids continue to age out and we see the style of RV that they reenter the market into being slightly different I wanted to just clarify this point and drive it home a little more not almost 900000 used <unk>.
Rvs changed hands in this country last year and a very small subset of them happened at the dealer level. The reason that we believe that our lead volume is growing and our used volume is growing as people are liking the values and the fairness and transparency of our process and not having to have.
Some stranger come to their house or put it in a classified AD or go through all the gyrations historically dealers have tried to quote unquote steal the trade or steal the purchase and we've decided as a good Sam company to put that process on full display. If you go onto good Sam Dot com today.
And I encourage people to do it and you make up a name and a unit at a model you will see what that process is like and I think consumers based on the marketing that we made to them are seeing that this is an easier way for them to monetize what was already happening in the marketplace. This idea.
Is that all of these people are leaving the industry is just a false notion. It hasnt happened for 40 years RV Ing isn't a fad it existed when the interest rates were at 19%. It existed when there was a gas shortage. It existed when there was a war, it's always existed and it's not.
Going to go away and I think what has grown the market and this is a very important point what has grown the market is that we have very intelligent manufacturers like Thor and forest River that are constantly investing their dollars into innovating products for the younger newer buyer something you can tell with a lighter cars.
Potentially you could tell within an electric car at some point so that innovation along with the historical traditional buyer is what has allowed this industry to grow year after year after year.
Got it. Thank you and then if I can kind of sneak in two more can you what's your used units per location.
And then also are you still expecting to I think last quarter. You said 12 to 18, new locations next year is that still the target or has that gone down.
Matt is going to look up the number of used units per location, but im sure Hell punctuated with we still are under stocked by location from where we want to be on a us basis.
And in terms of opening locations. We are scheduled to open stores. We have some of them built we are not going to open stores or spend any money of any kind until we have visibility into where we're going if opportunistic acquisitions pop up we are going to do everything.
We can do contractually.
Lock that transaction.
But we are in cash build mode and opportunistic acquisition mode. If we have stores that are finishing construction today, which we do or some that have finished construction last month, which we do we are locking that door and we are waiting until we have visibility so that no unnecessary.
<unk> leaves our bank account when it doesn't have to.
Okay.
Okay.
Firstly just to follow up on that inventory level per store, we're sitting at about 160 used units per store on a same store basis right now.
Oh excuse me I'm, sorry, 79 per store on a same store basis excuse me.
And that's actually basically flat year over year.
It's not enough.
Okay.
10, 10 to 15 units short per location and one of the strategies when we decide to get some of those stores opened as we will be opening some standalone used stores that we've made the decision on Theres no additional investment in that it's just a mix and margin profile model.
Vacation, we think the return on those stores will be pretty darn good.
Got it.
Next question comes from Tim <unk> with Quest.
Please go ahead.
Good morning, Thanks for taking my question I, just want to follow up on the last question. So your used vehicles you pulled back on inventory there during second quarter before starting to build back in third quarter and it sounds like you're under where you wanna be so what if any impact there.
Pull back you remember towards <unk>.
<unk> sales in third quarter.
I bet, you know, what's the timeline to kind of get to that 10 to 15 more units per dealership that you'd like to have.
I would maintain that.
We actually it is going to be difficult to quantify that opportunity cost, but I could definitely confirm that we did give up some opportunity on used sales, especially in the early part of Q3 I think by the latter part of Q3, we started to pick up some momentum in the way of us sales and that started the transition into October .
<unk>.
My hope is that as we fast forward throughout the entirety of next year, we continued to yield more and more results as we continue to be able to acquire more and more used but over the past 12 months. We basically have just been able to procure just a little bit more used units compared to what we've been able to sell so we're constantly up against this battle to rebuild these <unk>.
<unk> and constantly be able to procure more as we're even expanding into more and more stores here too. So we understand that this is really just the beginning of us continuing to aggressively pursue used assets and the name of fulfilling this ultimate goal of taking more market share in the used space.
Great and then it sounds like it's still pretty confident of a $3 billion.
New or used to revenue.
Whats the timeline to get there at this point.
Rather than giving you a timeline, which I know everybody wants because that would be giving some sort of guidance.
The fact that we are $400 million higher on a TTM today than we were back then gives us confidence that we have substantial momentum in achieving that.
If you asked Matt and we were not a public call. He would probably say a couple of years I think we've just got to be realistic that we're in an environment that has some uncertainty in the next five to six months. They use business will still be great, but it's not the momentum we were looking for a little tailwind to get there and so I think we'll be able to provide better clarity of that.
Probably six to eight months from now right.
Alright, thank you.
There are no further questions at this time I would like to turn to file.
Mark does pneumonia for closing comments.
Thank you so much for joining us I just want to reconfirm that our company is committed to making whatever changes it needs to make to our head count to our SG&A overall to deal with whatever headwinds are in front of us and that in our 20 years of being in this business headwinds happen. They don't last as long as <unk>.
People think they're going to last and when they come back when the market comes back it comes back pretty fast. So we look forward to reporting our next quarter here in February have a great holiday.
Okay.
This concludes today's teleconference. You may disconnect your lines.
At this time, thank you for participation have a great day.
Okay.
Okay.
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