Q3 2022 RumbleOn Inc Earnings Call
[music].
Greetings and welcome to Rumble on third quarter 2022 earnings conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
I would now like to turn the conference over to your host will know head of IR.
Thank you you may begin.
Thank you operator, good morning, ladies and gentlemen, and thank you for joining US on this conference call to discuss <unk> third quarter 2022 financial results.
Joining me on the call today are Marshall Chaz round normalized chairman and Chief Executive Officer and Darren.
Just a high number lines Chief financial Officer.
Our Q3 results are detailed in the press release, we issued this morning and supplemental information will be available in our third quarter Form 10-Q will be filed later today.
Before we start I'd like to remind you that the following discussion contains forward looking statements, including but not limited to <unk> market opportunities and future financial results that involve risks and uncertainties that may cause actual results to differ materially from those discussed here.
Additional information that could cause actual results to differ from forward looking statements can be found in <unk> periodic and other SEC filings.
The forward looking statements and risks in this conference call, including responses to your questions are based on current expectations as of today and number one assumes no obligation to update or revise them, whether as a result of new developments or otherwise except as required by law.
Also the following discussion contains non-GAAP financial measures for a reconciliation of non-GAAP financial measures. Please see our earnings release issued earlier this morning, yes.
Now I will turn the call over to Marshall Marshall.
Well good morning, everyone and thank you for joining us today.
As of August 31, we reached our one year anniversary of our landmark acquisition of right now and we are proud of the achievements. We've made in the last 12 plus months, we positioned ourselves as a leader in the new and used power sports market expanded to 55 retail locations with a management structure to drive success.
We established ourselves as the go to partner for the major manufacturers and are continuing to develop tools technology and processes to meaningfully improve the customer experience.
All while positioning ourselves for long term growth and profitability.
Look forward to more significant improvements as we continue to build the future of power sports.
In the third quarter, we made solid progress and continue to demonstrate our market leadership, while we saw anticipated and previously discussed seasonal impacts across our business, we sold well over 18000 power sports units in Q3 and generated over $385 million in revenue from the power.
Sports segment alone.
Power Sports segment results exceeded our prior expectations.
Our overall results were impacted by our strategic decision to purchase fewer automotive units during the quarter due to high wholesale costs unstable valuations, increasing freight costs and a shift in how used wholesale auto distribution takes place due to what we see as permanent structural changes in the.
Post Covid wholesale auto business, we are exploring strategic alternatives for this segment and expect to execute our plans in the coming months.
This does not impact our profitable vehicle logistics segment wholesale express our automotive segment has become an increasingly smaller portion of our overall business. We are fortunate to have the luxury to effect the transition and emphasize our focus on our core business assets.
I'd like to focus today's call on the following three important topics first we remain focused on our number one objective improving the customer experience and our results demonstrate that we continue to take market share due to the early improvements we've already made.
Second we are building a generational company and we will continue to invest thoughtfully in technology facilities people and process.
Finally, we continue to see resilience across our customer base and we're taking steps to act nimbly and responsibly to ensure we are meeting customer demand, while managing potential risk.
I'll take a few minutes to discuss these themes and then I'll pass the call over to render to walk through the details of our third quarter financial results and our revised guidance for the full year 2022 before opening the call for questions.
First improving customer experience.
Our early success in transforming the customer experience is clear and encouraging. In addition to continued execution. We took home multiple dealer of the year awards in the quarter and throughout the year. We believe these awards validate our enhanced consumer offering and provide tangible proof that our efforts to improve that.
Power sports transaction are paying off.
Like to recognize the incredible work of our team members for always putting the customer first focusing on the lifetime value of our customers and embodying our mission.
We sold 17481 retail power sports units in the third quarter amid macro uncertainty.
We clearly continue to take market share and are pleased with our results in the early days of scaling this incredible opportunity.
As the first mover and driven by the best people technology and processes. We believe we will be the market dominant participant for years to come.
An important component of a superior consumer offering is unifying the customer experience across online and in store locations. We have fully integrated right now and freedom into Rumble on and look forward to day viewing right now as our unified brand across all of our consumer facing properties by year.
Yeah.
The name right now has a commanding call to action that we believe has become synonymous with power sports.
Paramount to our mission of improving customer experience will be the execution of a complete end to end digital transaction via our web site.
Our vision is to allow customers, who live beyond our stores geographic reach to access research and purchase from our unparalleled selection of inventory, including the opportunity to consult with our team of power sports experts, if a consumer so chooses culminating in home delivery.
This will not only be the first e-commerce offering in power sports, but the majority of those anticipated transaction will also be incremental further increasing our market share.
Investing in our vision.
We are investing in technology facilities people and processes, while remaining agile to react to any potential escalation of economic headwinds.
Developing the technology stack to support 55, physical locations and a seamless online experience is a key initiative for us and we've made great strides this year.
We expect full digital inventory integration via an all new corporate website and a whole new experience on right now dot com to be completed very soon enabling consumers to easily shop nationwide.
This is the next step towards our ultimate goal of launching our digital 100% paperless end to end buying experience in 2023.
<unk> evolving omni channel experience will bring together the largest inventory and a no hassle format without boundaries for the consumer and will be the next leg up of organic growth for the company.
We are growing our team of experienced tech experts, including our new CTO, who brings 20 plus years of technology implementation and platform experience. We've also made hires across product management software architecture information security and network operations.
Beyond our technology team, we made dozens of strategic hires across our organization, including finance facilities project management and brand marketing.
We are attracting and retaining top talent and look forward to benefiting from productivity gains as we advance our strategic initiatives.
We're continuing to build our fulfillment network for faster and more efficient processing of new and used power sports as well as parts in merchandise inventory.
Increasing this capacity will free up the service departments in our stores to focus on faster and more pleasant customer experience.
Fulfillment also allows for consistent inspection reconditioning photo and video, which will enhance the customer interface key to our digital end to end sales initiatives.
As we discussed on our last call we've launched operations in two fulfillment facilities. This year Concord, North Carolina in Orlando, Florida and are encouraged by the initial result.
We are testing public access to our Orlando warehouse offering the largest selection of inventory of all makes and models with a warehouse look and feel.
Based on our initial customer response in Orlando, We believe there is a significant opportunity to employ this model and additional facilities and become part of our ongoing strategy.
We have recently secured a new fulfillment locations in Pennsylvania that will open next year. This will be our first physical location in the northeast providing access to a massive population in a region, where we have always acquired a significant portion of our used inventory.
Ultimately, we will manage every product we sell through fulfillment like almost all major retailers do today <unk>.
Industry wide showrooms and service departments are limited by their available space with constraints, primarily due to the size of the products in the fastest growing categories, such as side by side and personal watercraft.
Our fulfillment plan is substantially more efficient and cost effective and reduces the need for significant capex investments in our 50 plus physical locations.
Our vision includes fixed pricing and no fees, where our customers interact with a customer service representative and transact on an iPad instead of a traditional sales process with the antiquated and hated hassle of long negotiations with multiple departments and staff.
Everything we sell is a want not to need our customers enjoy our products for their next adventure and fund is at the core of the experience. We believe the entire buying experience online or in store should be the same funds.
We are creating a true destination for power sports enthusiasts and continue to make good progress towards our goal of launching our first ever customer experience center in Dallas in 2023.
We added multiple franchise brands from several manufacturers to our current location and we will continue to do so our best performing stores continue to be those that represent a broad array of products and manufacturers.
This vector of organic growth direct award of a franchise from a manufacturer has significant return potential as we don't pay for the franchise. If it is awarded from the OEM.
Our current focus is on organic growth of our existing locations and fulfillment Center network, while we plan to make prudent high return investments in inorganic growth in the future. We are extremely selective and we will continue to exercise discipline in that regard as the current uncertainties and economic conditions stabilize.
Which could cause costs of future acquisitions to improve.
Lastly, I would be remiss not to address how we are seeing the current macro environment impact consumer demand.
Our robust selection of inventory is a clear advantage for rumble on while demand for our offering is proving resilient certain trends are beginning to surface for the most part in regards to vehicle type and price point.
We saw continued strong demand in some segments such as new utility vehicles and used motorcycles. We are closely monitoring the economic headwinds and we are not currently seen softening in demand at levels others have discussed we believe our diverse product mix combined with our parts accessories merchandize service and <unk>.
Finance program leave us well positioned to continue to capture profitable market share amidst various demand environment.
For new vehicle supply manufacturing supply chain issues appear to be rapidly improving for the first time since the onset of Covid.
In the third quarter OEM ship more vehicles.
At higher prices in order to replenish supply.
Showroom inventory levels, which were not expected to normalize until late in 2023 at the earliest as quoted by many of our manufacturer partners are now fast approaching those levels. While we were surprised by the pace of inventory replenishment in the last 60 days or so we are glad to have better selection for our customers and.
Our managing days of supply by manufacturer very closely.
We'll work with Oems to achieve normalized inventory targets of the right units for the right markets and in the right quantities. We do anticipate seeing maximum inventory levels of some products makes and models in the very near future.
Turning to used access to high quality used inventory is key to our model like in new disciplined days of supply is being monitored very closely as potential shifts in the macro environment play out.
In October we announced a $75 million used power sports vehicle inventory financing credit facility from Jpmorgan Chase given us the flexibility to fund our inventory purchases, while executing on our mission and growth plans.
Our business model affords us flexibility to move rapidly in reaction to market changes and we are continually monitoring the macro environment and the consumer sentiment.
We are being deliberate and prudently managing operations to maintain optionality and mitigate potential risks we cannot control the macro environment, but we are confident in our model as we execute on strategic priorities.
Our differentiated positioning emphasis on better customer experience superior offerings and current market share combined with our talented teams operational rigor will enable us to deliver long term profitable growth for our shareholders. We are improving the customer experience and I'm proud of the progress thus far I'll now.
Turn the call over to <unk>, who will take you through the details of our financial performance.
Thank you Marshall and good morning, everyone.
Please refer to our earnings press release, and third quarter Form 10-Q to be filed later today for full details of the quarter.
As a reminder, we closed our acquisition of right now power sports on August 31, 2021, and therefore, we will lap the acquisition impact in the fourth quarter.
Unless otherwise specified all of the third quarter comparisons cited in my remarks today are sequential competitiveness.
Now moving on to some key highlights.
We are pleased to report solid results for the third quarter with seasonally impacted revenue and gross profit.
The power sports segment.
Despite a tough macroeconomic backdrop, we saw healthy consumer demand in this segment in the third quarter.
While we are not immune to macro headwinds, we remain prepared to respond quickly and prudently to evolving conditions.
In the third quarter, we sold 19908 total units down 14, 7% sequentially due to our decision to purchase less automotive inventory combined with the typical seasonal impact experienced in power sports.
We sold 18393 total power sports unit.
Sequential declines up 11, 2% in total power sports and 12, 9% in used retail power sports.
Head of our prior expectations.
We delivered total revenue of $473 million down 13, 9% sequentially.
Primarily by nearly 40% decline in revenue in the automotive segment.
Our sports segment revenue of $385 $4 million declined seven 1% sequentially.
Pivotal to expected seasonality.
Revenue from finance and insurance Nap was down 14, 3%, while revenue from parts service and accessories sales.
Client four 7% from the second quarter.
Total gross profit for the third quarter was $116 3 million down 15, 7% from the second quarter.
Total gross profit margin was 24, 7%.
<unk> from 25, 3% in the prior quarter.
As we had anticipated the sequential decline in gross profit margin was driven by ongoing normalization after supply demand imbalances that have inflator GPU in recent history.
And was further exacerbated by a 60 plus percent decline in automotive segment gross profit.
As Marshall mentioned, we made a strategic decision to purchase fewer automotive units during the quarter.
Hi, wholesale costs and the auto market, resulting in lower gross profit per automotive vehicles.
While moderating our activity in the automotive segment negatively impacted our total revenue and gross profit dollars into third quarter.
In the power sports segment, partially offset this impact.
Further excluding the automotive segment gross profit margin would have been 28, 6% in the third quarter, demonstrating the earnings potential of our core business.
We have conviction in our decision to begin exploring strategic alternatives for the automotive segment. So we can focus on our core power sports and vehicle logistics segments.
As we have previously discussed we anticipate modest margin contraction as we focus on our sand volume and growing market share.
We are not currently seeing any measurable reduction in demand indicators for our power sports segment. So we continue to fulfill their demand while optimizing our inventory mix.
Total SG&A expenses were $96 $2 million or 25% of revenue compared to $100 2 million.
Our 18, 3% of revenue in the second quarter.
Declines in SG&A are primarily attributable to seasonal volume declines as well as a reduction in the variable compensation expense and advertising and marketing expense lines.
SG&A as a percentage of revenue increased quarter over quarter due to the decline in revenue combined with head count additions and facilities investments Marshall previously discussed.
While we have levers to pull to reduce certain expenditures. The investments we are making will provide the foundation for long term sustainable growth as we continue to scale down the line.
As we have previously discussed we do not expect leverage from SG&A expenses this year.
Within SG&A total stock based compensation was approximately $2 6 million.
Down from $2 8 million in the second quarter.
Adjusted net income was $4 $4 million and adjusted diluted earnings per share was 27.
For the nine months ended September 32022, adjusted net income and adjusted diluted earnings per share were $34 1 million and $2 14, respectively.
Adjusted EBITDA was $25 7 million in the third quarter down 42, 1% over the second quarter driven by modest gross profit margin compression in the power sports segment and.
And lower gross profit contribution from the automotive segment.
Adjusted EBITDA was $101 $4 million year to date, our six 9% of revenue.
Year to date, we have generated $4 7 million in cash flow from operations. This was negatively impacted by cash used primarily for used inventory purchases, which were not financed by trade floorplan credit facilities.
As of September 30, cash and cash equivalents, including restricted cash was $49 2 million.
Our total liquidity defined as cash and cash equivalents, including restricted cash plus availability under our short term revolving credit facilities totaled approximately $193 8 million.
With the closing of our $75 million used vehicle floor plan financing facility, we have built the option to provide additional liquidity.
Our top capital allocation priority remains to invest in our business and we will balance our investments with a continuing focus on profitability and cash generation.
Now turning to outlook, we anticipate both sequential and year over year growth in our power sports and vehicle logistics segments.
Our activity around automotive will be muted for the remainder of the year due to our decision to explore strategic alternatives for this segment and we therefore expect sequential declines in unit volume.
Revenue and gross profit in this segment.
Our outlook is based on the consumer demand trends, we are seeing today.
And reflects our assumptions for continued resiliency throughout the remainder of the year.
We will make responsible investments that factor and macro conditions as we continue to stay focused on building a scalable organization.
As outlined previously we do not expect leverage in SG&A for the remainder of the year.
As such we are revising our full year 2022 outlook to account for the strength in our power sports segment.
This will be partially offset by anticipated decline in the automotive segment.
Total company revenue within the range of $1 85 to $1 9 billion.
With power score segment revenue of at least $1 5 billion.
Note that prior total company revenue outlook implied revenue outlook of one for $5 billion by the power sports segment at the midpoint.
Performance expectations in the power scores segment assume growth in the us retail power sports units to be in excess of 50% year over year with low single digit decline in new power sports units year over year normalized for the freedom acquisition.
We now expect non power sports segment, which includes automotive and vehicle logistics.
Revenue within the range of $350 million to $400 million.
Even by anticipated volume declines in the automotive segment.
The prior full year revenue outlook range for non power scores segments was approximately $500 million.
As we have indicated previously we expect modest gross margin compression due to the combination of input cost inflation and availability of new inventory, which helps to address the supply and demand imbalance.
As a result of these dynamics, we now expect adjusted EBITDA of at least $125 million for the full year.
Our revised adjusted EBITDA outlook is due to expected lower realized gross margin in the automotive segment.
Anticipated modest gross margin compression in the power scores segment and continued expectation of ongoing organic investments and integration costs, resulting in no SG&A leverage for the remainder of this year.
We will provide 2023 guidance on our next earnings call. However, we would like to take this opportunity to share our confidence that the initiatives. We are currently undertaking will drive continued growth in our core power sports business.
2022 has been about building a solid foundation.
As we look ahead to 2023, we expect to continue to deliver profitable growth, while making organic and inorganic investments in areas that we believe will drive the most long term value for all of our stakeholders.
I will now pass the call back to Marshall for closing remarks, before we open the call for questions.
Thank you Miranda before we open the call to questions. We announced this morning that we've reached a global settlement of all current and any other potential or future claims with Mark <unk> and Bill culture, the former owners of right now while.
While neither expressed a present intention to sell any rumble on stock. The settlement does provide a mechanism for the orderly disposition of Rumble on shares.
It is important to rumble on and its stockholders to have these matters resolved and we are pleased to have bill and Mark continue stock.
Stockholders of the company.
I'll conclude my remarks by reiterating that our results demonstrates the resiliency of our diversified business model. Despite the uncertainty in the macro environment. We are building the future of our sports and we will remain focused on achieving our long term goals.
While delivering an unparalleled customer experience through our unique omnichannel offering so.
So thanks again to the entire Rumble on team for all of the hard work and dedication to our mission operator, we're ready for questions.
Thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question comes from Eric Wold with B Riley. Please proceed with your question.
Thank you good morning, Marshall and rigor.
Two questions. If I may I guess, I guess first off they render one for you just on the guidance you provided I know you reduced.
The EBITDA.
EBITDA guidance from $1 45 to $1 25, and comment on the reasons for that but the press release didn't mentioned the $20 million.
That's been the normally expected expenditure in previous Mega centers year, that's inclusive of 20 million or $20 million.
Great. Yes, so thanks, Eric for the question. So a good question to clarify.
$125 million is inclusive of the investments, we're making but we're not backing that out from our guidance.
So to give you a little bit.
I'm sorry.
Yes, so to give you a little bit more color on that.
Year to date.
The investment that is flowing through.
Turning to the operating expense line is about $13 million.
And in addition to that if you look at the balance sheet, we have about $10 $5 million capitalized for the investments and in facilities and technology. So we will continue to expect.
This to continue in the fourth quarter. There is no reason to pull back on these investments as these are for the longer term.
Foundation building and scaling up the company.
I also want to make a note that what you also see in the SG&A expense and we don't back this out I want to remind everyone that there are some purchase accounting adjustments that run through the operating expenses.
<unk> of the acquisition accounting purchase accounting debt that we have to do.
And that you would recall that we had made some changes on the leases, which essentially results in incremental expense kind of flowing through the facilities line.
Which obviously, we're not backing out so so that is there as well.
Perfect. That's good to hear thank you.
Marshall a couple of questions just on kind of the overall environment I know youre talking about youre not see.
The broad based weakness in demand for power sports. So maybe talk about where you are.
We're seeing some weakness.
Yeah.
Is it reasonable or are you seeing it on a trade down in price that youre kind of lower price point products.
Are you seeing any difficulty in consumer and getting financing, maybe just anything that kind of shows.
Maybe changing or if youre, not seeing that and youre not.
Yeah, No we're definitely seeing some I mean whats the guidance, we're giving today is really based on what we've seen through the third quarter, but as well as October .
The demand the showroom traffic.
Online traffic et cetera, we're not seeing diminishing any measurable levels.
Think obviously the consumer is under pressure I think consumers under pressure on financing rates prices are increasing both on the goods, we sell as well as everything else. The consumer is dealing with so we have a.
We have what I would call a recession playbook.
Eric and.
We have deployed pieces of it already just in what we're seeing that's pretty clear.
But we will we will deploy whatever necessary as we move forward.
But right now.
Outside of my comments with regards to inventory, we don't see we don't see any need for any knee jerk reaction at this point.
Got it and then just final question for me.
Yes.
Thank you.
You talked about some of the guidance includes.
Some kind of marginal pressure on.
Gross margins in the power sports vivo kind of what levers do you have to kind of maintain gross margin hold the line I know that you kind of adjust.
What you are purchasing out there and what you pay for product and bringing insurers to recondition, but what about maybe inventory that's already on the floor in hand.
What can you do to sort of maintain those gross margins you are seeing some.
Some pressure for a modern consumers.
Yes, good question.
We've said all along that at some point as showroom inventories normalize that there would be no.
<unk>.
Of GPU as well.
The new site is purely I think inventory versus demand question as I pointed out in my in my comments.
I think I think everybody, including ourselves had had an unknown answer to supply chain challenges and I think everybody.
Extrapolated that out to the to where this was not going to correct itself for anytime in the near future at least through 2023 and it certainly has at this point. So we think we will continue to see an opportunity for increased.
Volume on the new vehicle side, but could have some normalization on the GPU and we are expecting that.
But as you can see in our third quarter numbers I mean, it wasn't dramatic by any means from Q2, which is always the best quarter and we didn't have as many economic headwinds.
I think.
The management of our used margin that we are still not in control of.
Once we have the technology, which we're very close on to be able to centralize that inventory and control fixed pricing.
We think there is some long term opportunity actually on GPU on the on the used but right now because it's still done the old fashion way, we're kind of each store is setting their prices and we just think that.
It could be it could experience. Some some pressure there is there has to be a relief valve right. When the when the price is higher the interest rate is higher to the consumer.
It has to show up somewhere.
Along with higher prices right. So that's that's really what we see we do expect some normalization.
Perfect. Thank you Bob.
Our next question is from Seth Basham with Wedbush Securities. Please proceed with your question.
Thanks, a lot and good morning. My first question is a follow up on the last response when Youre thinking about normalized used in new power sports GPU. What are you aiming for in 2023 and 2024 do you expect those to be normal years.
Yeah.
Well, we haven't given guidance in that regard, but we don't see.
Any need for adjustments with regards to used it's kind of a different animal.
On the new vehicle side, we would expect that to <unk>.
Normalized.
I wouldnt utilize pre Covid GPU at this point because the mix of the products that we sell is dramatically different today and when you look at the fastest growing segments being side by sides and that in that off road category.
Are some of the better margins that we have.
Okay.
Got it so somewhere north to pre Covid Gpus on the new side and on the used side in the near term you expect additional pressure likely into 2023 longer term and you see opportunity for improvement.
Correct.
You saw some.
A lot of times, we don't put a lot of emphasis on our other categories be it parts accessories, merchandize and service, but when you look at the total gross profit makeup of the company, it's very well balanced between those categories and we are not seeing pressure on on those categories, which kind of is.
I think normal at least it was my experience in the automobile business that if people are in a position to where they arent they can't or they don't want to trade today. It does typically drive some offset in your service Department.
Got it thank you.
Then a follow up question is just on the <unk> segment.
During strategic alternatives there.
What are the structural changes that you see in the wholesale auto.
Industry right now leading you to that decision.
I appreciate the question.
Hoping that would be asked that.
Thank you.
Seth you are aware that we have a lot of automotive knowledge within our management team.
We think that the way keep in mind, we were we were only in the wholesale business.
And the way the redistribution of wholesale has.
Has changed primarily due to technology I believe it had started prior to COVID-19, but what happened in my estimation is that COVID-19 accelerated it.
I think the opportunity to in a very skinny margin business to operate a basically a wholesale arbitrage play.
In the supply chain.
We just don't anticipate its coming back just to be totally clear. We think that this was not just a COVID-19 effect that everything will go back to normal.
If you look at.
You see it you follow a lot of the auto companies.
If you think back to the makeup of an auction inventory pre COVID-19. It was made up of rental cars off lease.
It's those types of things because of technology and the fact that a lot of them were shut down during during COVID-19.
Everybody is now redistributing those products upstream with the use of technology and so I think just the whole structural.
Wholesale and supply chain for pre owned automobiles.
Is changing and we're not going to we have the luxury to do something different and we're going to take we would take that advantage. When we're making good money at the wholesale business. There was no reason to consider it because we didn't dedicate a lot of time or effort to it.
As you know businesses become more challenging they do require more.
Effort on the management team and we just feel that being focused on power sports is <unk>.
Definitely in our best interest.
That's helpful perspective, and then lastly, as it relates to the integration of right now clean technology integration to help the centralized inventory and pricing.
There are you relative to your expectations. When you closed the transaction are you on track and when do you expect to complete that.
We will be.
We will have a lot of it completed in 2023.
I would tell you from my personal perspective, we're probably a little behind where I was hopeful of being and the reason for that is because of some other priorities that are that are very very important we've talked to you before about.
This was our first year of Sox compliance as an example, and all these different things that have taken up a fairly small technology team's efforts to be able to do this but we're very very pleased with what is available.
The nice part about it is when this website and web sites are launched.
Now everyone will be able to see what the next.
Consumer experience of an online power sports sale is going to look like.
And it will be rolled out in phases.
But you will see it very very soon and you'll see the results of a lot of hard work of a lot of people both internal and external.
Got it thank you and good luck.
Thanks appreciate it.
Our next question is from Michael Baker with D. A Davidson. Please proceed with your question.
Thanks, Okay. So.
It's still not entirely clear to me, maybe maybe I'm, a little dense but in the pre.
Our prepared comments Morris you talked about seeing some signs of.
Of concern you.
You keep saying that demand and all of that is strong. So again, one more time what are those signs of concern does that is that when you refer is that the gross margin issue that you're referring to that pricing has maybe come down a little bit relative to input costs or is it.
Mix thing trade down to different kinds of vehicles.
Not entirely sure what you meant by that comment that you're starting to see some signs of macro.
Okay. Good good question I'll try to be a little clearer I think that we are seeing.
Some issues with regards to mix alright.
Our higher end units, which you can kind of see from our Asps are higher end units continue to be in high demand, but we are seeing some softening in the lower priced segment.
And I think that runs along with a lot of those end up being cash transactions because of the price point and I think people are in a different cash position today than than.
And then they might have been.
So we're also we're also basically seeing that the price increases from the manufacturers, which are due to the same.
Headwinds in there in that regard.
Our continuing to cause some issues for our customers.
When you increase the cost and you increase the interest rate and a short window of time.
It does take some people out of the mix, what we said by nuts, we don't see a decrease in demand what we see is as these prices rise in interest rates rise et cetera.
There is situations where people can't afford the product and.
That will normalize over time, but we're certainly seeing that.
So you say no decline in demand.
But you're seeing some softness I mean, the conversion is down a little bit when you were talking about demand correct.
Okay I got you, yes, obviously thats great Yeah, I'd say its conversion because as we said before we track showroom traffic and online traffic.
And we are not seeing.
It's some regional.
Shifting there, but we arent seeing it didn't make any type of meaningful numbers.
Understood. Thanks, and then can you just remind us how much of.
Your sales typically or even industry wide sales in your view are done with financing.
And so how much of this high interest rate environment do you think will impact to you.
If you looked at it overall.
It's north of 60%.
Okay.
Okay. So that's good alright, that's a pretty big.
Pretty big number.
Last question for me I think I read this right, but it sounds like just want to clarify your guidance for new sales is a little bit better right. It's down low single digits. It was down as I recall in the second quarter of the previous outlook was down mid single digits is that a function of inventory being better.
Yes. This is <unk>, yes, that's correct. So we have a better expectation on volume on the new side, but we are expecting low single digits. So youre exactly right.
I would point out and what we tried to point out in the in the previous notes is.
The downturn in.
And retail sales as reported by the manufacturers that have already announced.
We're not at that level. So you have to extract that that we are gaining we are gaining market share.
Because we're not we're not we don't have a downturn to what is being reported.
Understood Alright, I appreciate the color.
Thank you thanks, Mike.
Yeah.
Our next question is from Fred Reitman with Wolfe Research. Please proceed with your question.
Hey, guys. Good morning, I was hoping you could just dig into with unpack some of the inventory numbers I mean, thats, a pretty big move sequentially and I know that there is some seasonality at play but it sounds like that came back a bit faster than what you were expecting so can you talk about where that growth is coming from and sort of what the outlook is as we think about moving into <unk> in early next year.
Yes, the first thing I would say I. Appreciate the question. The first thing I would say is.
We have extremely manageable day supply both on the new side on the used side.
Think what you saw in the growth of the inventory.
Was surprising but not concerning from the standpoint that our showrooms were really really short in inventory.
I think the change that we saw loud and clear for us really revolves around.
The expectations that were set by the manufacturers we represent.
Throughout Covid.
The demand was so high in the supply was so low.
Nobody had any clarity on their supply challenges right and so we had we had literally thousands of units that were in our stores that we couldnt, even sell because they were missing a particular partner or something.
Whatever was the hold up in those supply chains that was expected to take much longer apparently is not taking that long because most of that has been taken care of fairly dramatically, but overall.
We order inventory.
Some of it is earned on allocation.
But we will manage that they supply.
Very effectively as we move forward.
In the current day supply on both new and used is really more than manageable.
Okay. That's fair and then just coming back to the earmark spending targets that you guys have for the year I think that that number was $20 million for the full year 'twenty two and then the render I thought it sounds like just based on the Opex and Capex number that youre already at $23 million year to date. So what is sort of the right number for spending in 'twenty to now.
And then how should we sort of think about that.
Continuing or potentially rolling off into 'twenty three.
Yeah.
Yes. Thanks for the question. So let me clarify so what's flowing through the income statement the.
The expectation for those operating expenses is about.
$13 million for the full year 2022.
So thats.
If I pull out microscope, that's what I can see.
What you see on the balance sheet is about tenant $10 $5 million.
Year to date, but we still have a quarter to go. So you can expect somewhat additions there.
We are not through with the 2023 planning cycle. So it's hard for me to give you a specific.
Specific steer on what the investment will be but.
Suffice to say this isn't a.
I'm going to invest in technology and facilities and our processes and then stopped.
We would expect that to continue I think Marshall outlined our strategic priorities in terms of technology and facilities.
Obviously, we have some more work to do.
On the organization side of things. So I would expect some of those investments to continue now as we finish the budget cycle and be taken into account all of the macro environment and do our scenario planning.
Figured out.
And how much capital we want to deploy for the next year, but.
Sitting here today.
I wouldn't give you that I think it's too early to say, but I would I would also reiterate that.
We spent a lot of our time right now looking at day day in and day out economic changes and challenges right. We do have a detailed recession playbook and this spend is obviously a big part of that playbook.
So with these aren't these aren't.
Commitments where were out.
With millions of dollars of commitment throughout 2023. These are things that we can slow down many of them we can.
Put off.
And that is all built into our playbook, but we also do not want to let US I said earlier have a knee jerk reaction and overreact like everybody, including US did at the onset of Covid and then deal with the ramifications of being behind on our initiatives.
Okay. So sorry, just to reiterate the numbers into the $13 million in Opex at your expectation for the full year or is that a year to date number.
Yes that expectation for the full year and the 10 and a half on Capex is a year to date number that will probably go higher.
Based on that's correct that's correct.
Perfect Alright, thank you.
Thank you I appreciate it.
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Our next question comes from Craig Kennison with Baird. Please proceed with your question.
Hey, good morning, Thank you for taking my questions as well first with respect to 2023 guidance should we expect that to exclude the automotive business when you provided.
Yes, that's a great question that would be the baseline planning scenario, Craig, but yet we would exclude that in our 'twenty three guidance.
We obviously have a plan in place for the automotive business, we are proceeding with that.
And we fully intend to execute that over the next 90 days or so.
I would not include automotive and <unk> tried to say guidance.
Thank you.
And.
I am curious Marshall on the sourcing side, if youre seeing any of these consumer trends that we've been talking about our consumers coming in to trade in trade up or are they coming in to trade to say, hey, I don't have the cash today and I need to raise some.
Yes, not necessarily on the trade I think theres been I've had some questions with regards to our people trading down.
That really isn't a phenomenon that I've ever really seen in my career.
But our people needing to sell absolutely.
I think that our cash offer tool is.
Becoming very very important for our customers.
And we have a lot of activity but.
Suffice to say, we are buying things today significantly less than we were six months ago.
So we are managing capture rates and all those types of things due to that so they are looking to sell we are still buying a lot.
Our trades are actually up and I think the recent trades are up is because of this mix situation that as we got more side by sides in those in those are units that have a higher likelihood of having a trade and so our trade percentages of the total of our total inventory are significantly higher today than they were say six months ago.
So is there any trend that you can interpret from that decision to sell to you I mean is it economic stress is it.
Consumers, who bought during the pandemic and decided it wasn't.
For them just curious why you might be.
That selling activity.
Yes, we obviously really track those types of motivations as we as we do our business I would say again, depending on the price point would drive.
Other people have negative equity, whether they have large loan balances.
You do see in times like this where people are trying to get off of a payment that doesn't mean, they're leaving the space. It just means that they need to take a breather because maybe one O. One of them lost their job or whatever the case may be and we have seen an acceleration.
In that regard, which again skews to a higher higher dollar unit, then does that $3000 dirt bike that the guy bought and it's sitting in his garage.
And as they come in sorry to press on this are they coming in with equity in general given the high prices.
Our high values of this equipment or is there any negative equity coming through the door as well.
Yes.
We're coming in with equity, but prices have come down fairly dramatically.
And that's purely because of the effect of new inventory now in stock.
I think where you saw that where we're seeing the biggest effect on cost is in that current year model and one year old pre owned vehicle and Thats, usually the FERC gets hit that $6000 unit it might be worth 55 today, where it was worth $6 six months from now, but those ones that we were able to put in <unk> be able to.
Retail at close to new prices, because we didn't have any new those are the ones that get impacted as far as.
Loan balances in negative equity.
We do see and we have always seen a significant amount of that and I would tell you that.
Without naming specific.
Manufacturers I think you can probably draw that conclusion.
Who has the highest.
Highest priced products those consumers do tend to have the most negative equity.
Got it and then just shifting gears marsh. So I wonder if you would expand on the warehouse strategy seems to be gaining steam in Orlando in and how that might.
Unfold in the Pennsylvania market, where you have less of a.
<unk> retail presence.
Yes, it's really it's really evolving.
And we're learning, obviously everyday and we're testing different different concepts within these facilities. We are very very encouraged by what we see.
But let's let's take let's take one and two different pieces will talk about Pennsylvania, but let me let me discuss Orlando.
We have a very very interesting location in Orlando.
<unk> you own a very high highly populated area and when we walked in that facility and saw hundreds and hundreds of of all makes and models.
<unk> came to mind why on Earth, when we open this up to consumers.
Yes, we're processing.
To our stores at some point, but how many people would love to lock in and not have the typical sales process and everything else and be able to buy at fixed prices and select from that kind of inventory and the initial reaction has been extremely positive. So we are looking at that we're looking at size of facility.
There is a I would say Orlando is probably one of the smaller.
Our initial bill.
Belief, it's probably too small.
And then we have a very large one underway as you know and in Dallas, Texas, and then Youll have Pennsylvania, which is kind of in the middle.
The purpose of Pennsylvania is twofold.
Number one the majority a high percentage of all of the used vehicles that we buy come out of the northeast and I would tell you that the quality of the vehicles that come out of the northeast from our data is significantly better.
So it's not sitting outside they can only write a portion of the year, they have lower miles and so on and so forth.
The fact that we have closer in and less cost closer facility to where we're acquiring the vehicles. We believe is going to make a dramatic change on our inbound freight costs.
Surely seconds.
Secondly.
This market has access to 90 million people.
And we think on the retail side, our wholesale funding in our warehouse concept could also be very very interesting.
So that's the portion there and then the last piece with regards to those as I think Pennsylvania is interesting because as you said, we don't have any new vehicle franchises there.
How dramatic can we affect the market and grab market share in that market.
Focusing on pre owned.
I think that.
We're pretty excited about that because thats, a 100% organic growth.
And could produce millions of dollars of revenue growth and gross profit.
Great Hey, thank you.
You bet. Thank you Craig Thanks for everything.
We have reached the end of the question and answer session I would like to turn the call back over to Marshall for closing comments.
Well I want to thank everybody for joining us today, we've got lots to look forward to and lots of moving pieces as a company. We're staying absolutely focused on the key priorities, we have a laundry list of opportunity.
<unk>, four <unk> and myself and the rest of our management team, it's really a job of focusing on the biggest opportunities first.
Then doing them in a very disciplined methodical way and making sure that we have an effective playbook. So if in fact, we don't anticipate it but if in fact.
The market.
Even more crazy from a from a economic perspective, we're going to be in a position to have to react very quickly. So with all of that we really appreciate all of your time, everybody have a great day and we'll talk to you in a few months. Thank you so much.
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