Lazydays Holdings, Inc. (NASDAQ:LAZY) Q3 2022 Earnings Conference Call November 3, 2022 10:00 AM ET
Company Participants
Debbie Harrell – Corporate Controller
John North – Chief Executive Officer
Nick Tomashot – Chief Financial Officer
Conference Call Participants
Steve Dyer – Craig-Hallum
Mike Swartz – Truist Securities
Operator
Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Lazydays Holdings, Inc. Third Quarter 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] Thank you.
Debbie Harrell, Corporate Controller, you may begin your conference.
Debbie Harrell
Good morning everyone, and thank you for joining us. On the call with me are John North, Chief Executive Officer; and Nick Tomashot, our Chief Financial Officer. Before we begin, I would like to remind everyone that we will be discussing forward-looking information, including potential future financial performance, which is subject to risks, uncertainties and assumptions that could cause actual results to differ materially from such forward-looking statements and information.
Such risks, uncertainties, assumptions, and other factors are identified in our earnings release and other periodic filings with the SEC, as well as the Investor Relations section of our website. Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and any or all of our forward-looking statements may prove to be inaccurate. We can make no guarantees about our future performance and we undertake no obligation to update or revise our forward-looking statements.
On this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings press release, which is available on our website for how we define these measures and reconciliations to the closest comparable GAAP measures.
With that, I’d like to turn the call over to John.
John North
Thanks, Debbie. Good morning, everyone, and it’s nice to be with you today. I’ll start with some [thematic] [ph] comments and initial observations. I’ll turn it over to Nick to walk you through some financial highlights and then we’ll take any Q&A thereafter. It’s a bit of an atypical call as it is my first opportunity to speak to analysts and investors since joining the organization almost 60 days ago.
Of course, given the scale of operations and the attendance complexity of the retail segment we operate in, many of my thoughts thus far are preliminary. I am getting to know our leadership team, learning other dynamics of our business, and triangulating our strategy based on the expectations around the broader industry in the balance of 2022 and into 2023.
One thing that is immediately and abundantly clear is the strength of our culture. I have had the chance to meet many of our employees to spend time with our leaders in both our corporate office and the field and to observe firsthand what we call the Lazydays way. The culture is deep and impressive in our company. While I’m fortunate to join the team with such an important hallmark of success already in place, it is also my goal to enhance and reinforce these cultural elements that will position us to grow and achieve more success in the future.
Certainly, over the last three years, there has been more than ample precedent in companies declaring unprecedented times. Instead of repeating the mantra, I’ll note that our role as leaders and stewards of the company require us to be nimble, to respond in both good times and bad and to seek the strategic opportunities that often arise as a result of disruption to the marketplace and the economy.
The third quarter of 2022 marked the return to a more normal operating environment across our company, the improving availability of inventory, slowing retail sales environment, and rising interest rates caused associated effects to our unit sales levels, financing penetration, gross profit generation, and lack of leverage in our SG&A expense. Those are the facts and they manifest in our results reported earlier today.
However, our team has not been sitting idle waiting for this to occur. Over the past 90 days, we have been working diligently on improving the [indiscernible] inventory, particularly by reducing 2022 model year units, finding operational efficiencies both large and small and challenging our stores to improved performance across all business lines. We look forward to updating you on our progress in these areas on future calls.
You’ll also notice we obtained our financial disclosures attached to the press release distributed this morning. We believe in transparency in our operations and prefer to let our results speak for themselves. Committing to detail and robust sharing of information allows our stakeholders to objectively evaluate our performance and hopefully engenders credibility in our team as stewards of your capital. We hope you will find this additional data helpful in your analysis.
Now, a few initial words around our strategy before I turn things over to Nick to take you through our results. I’m incredibly excited by the future that lies ahead for Lazydays. We have a one of a kind brand, a great network of 18 stores operating profitably today with four more locations currently under construction.
Additionally, there is a rich pipeline of opportunities in the marketplace to support both further acquisitions and greenfield development. Our mandate will be to profitably grow the company and to deploy the free cash flow generated to add incremental scale and network effects to our business. Clearly line of sight to a 100 or more stores as possible as evidenced by several competitors that have already achieved that scale in our space.
We will be both disciplined and relentless in driving our operating performance, working hard to be the partner of choice for our OEM partners and ensuring we diversify our revenue mix to reduce reliance on new unit sales, used units, finance and insurance, and in particular fixed operations provides a more consistent counterbalance to reduce income statement volatility, due to the inevitable cyclical swings in the RV sector.
As we have stores, the leverage of our infrastructure can pay dividends not available with competitors at a smaller scale. Using the size and sophistication of our company, we can deliver superior relationships with vendors, optimize shared services functions, and develop and refine specialized knowledge and capabilities in areas, including technology and marketing that just aren’t available with smaller companies. This leads to below line efficiencies and higher net income and cash flows that are otherwise not possible at the standalone store.
In a departure from our past strategy, we aspire to own our real estate. We believe mortgage financing can still provide ample capital to not [retire] [ph] our growth and achieves a structural cost advantage over time. As a broader matter, we believe in making decisions for the long-term benefit of our customers, our employees, our shareholders, our communities and the world around us. This framework is simple, but not easy.
We endeavor to commit our time and our treasure in pursuit of durable excellence, including for example, our investment in owning our land and maintaining a conservative capitalization. If successful, our horizon will be a competitive advantage over time.
Finally, I’d like to officially welcome Kelly Porter to the team and to publicly recognize Nick for his hard work as CFO as he transitions into retirement. Kelly’s first day was Monday, and I’m pleased to report she is on the ground with us in Tampa. She has over 25 years of automotive experience and I can’t think of a better partner to add to our senior leadership team as we pursue the strategic objectives I outlined a few minutes ago. So, to Nick, I’d say thank you; and to Kelly, I’d say welcome. I couldn’t be more excited.
With that, I’ll turn the call over to Nick to take you through our results.
Nick Tomashot
Thank you, John. Please note that unless stated otherwise, the 2022 third quarter comparisons are versus the same three-month period in 2021. Total revenue for the second quarter was $334 million, an increase of 4.7% from 2021. On a same store basis, total revenue declined 15.2 million.
Total unit sales, excluding wholesale units were 3,712, up 103 units or 2.9%. On a same store basis, unit sales excluding wholesale were down 274 units or 7.6%. The average selling price for new units increased 3.4% and the average selling price for pre-owned units decreased 4.8%.
Our same store results were affected by the impact of Hurricane Ian, which affected our Florida location’s ability to deliver units at September month-end. We believe this is purely a timing difference and expect the impact on full-year results to be minimal. Finance and insurance or F&I revenue declined 7.7% to 18.6 million. Same store F&I revenue was down 15.5%, reflecting a lower financing attachment rate, primarily as a result of more cash buyers due to rising interest rates.
Revenue in service, body, and parts, as well as other operations was $14.4 million, an increase of 12.2%, compared to 2021. On a same store basis, it was 13.3 million, up 3.5%. Gross profit, excluding non-cash LIFO adjustments was $79.7 million, down 9.9 million versus 2021. Gross margin excluding LIFO adjustments decreased to 23.9%, compared to 28.1% in 2021.
Our market declines reflect both the normalization of consumer demand and product availability, as well as discounting to improve inventory mix and reduced 2022 model year inventory. SG&A for the quarter was $55.8 million, up $7.4 million compared to prior year. $5.3 million of this increase is attributable to overhead associated with the Portland, Oregon, Vancouver, Washington and Milwaukee, Wisconsin dealerships acquired in August 2021. The Monticello, Minnesota dealership opened in March 2022 and the Tulsa, Oklahoma dealership acquired in July 2022.
Q3 SG&A as a percentage of gross profit increased from 53% to 73% in 2022, reflecting a more normalized level for steady state of our business. Adjusted net income was 11.1 million for the quarter, down from 28.8 million last year. Adjusted fully diluted earnings per share were $0.54 compared to $1.16 in 2021.
Now, to discuss liquidity and capital allocation. As of September 30, we had cash and cash equivalents of $100.8 million, an increase of 2.7 million from December 31, 2021. We were comfortably in compliance with our debt covenants and our covenant leverage ratios stood at 0.21 at the end of the quarter. As of September 30, 2022, our revolving credit facility was undrawn and we had 14.8 million of non-floor plan debt outstanding.
Between our cash balance, available credit on our facility of 61.7 million and estimated proceeds available through mortgages on owned real estate, we estimate total available liquidity of $177.5 million. From the start of the year through November 3, 2022, we had repurchased approximately 2.7 million shares of common stock at an average price of $16.54 retiring over 18% of our shares outstanding.
We remain opportunistic repurchases of our stock and we’ll have a balanced approach to capital allocation, including internal investment, acquired and organic growth, and share repurchases in the future.
With that, we can open the call to questions. Operator?
Question-and-Answer Session
Operator
[Operator Instructions] Your first question comes from the line of Steve Dyer from Craig-Hallum. Your line is open.
Steve Dyer
Thanks. Good morning. Welcome John and Kelly.
John North
Thanks, Steve.
Steve Dyer
I guess starting, sort of big picture and you’ve touched a little bit on some of it, John, sort of in your first couple months of the job, maybe any sort of observations that stand out and/or are there a couple of real opportunities that you sort of see here over the next, call it, one to two years getting started?
John North
Sure. I mean, it’s early. I think I hit 60 days here Friday. So, I hope I’m definitely still in listening mode probably more than talking mode. But I think in general a lot of the evolution that automotive retail went through over the last let’s call it 15 or 20 years is pretty applicable here. I think focusing on maximizing used F&I and then particularly the service business, which is probably quite a bit different than I anticipated just in terms of the complexity and timelines required to do stuff, compared to a car, I think are all really important.
And those will, I think, probably reduce volatility in terms of just our revenue levels and then the associated profitability. So, that’s I think a big focus and something that we’ve already been talking about in operations, which is how do we make sure we’ve got the flywheel effect of all these businesses working together. And then I think I’ve got a pretty different approach and Kelly and I have talked a lot about acquisitions going forward and I think we had a real focus on opening locations de novo in the past and that’s great.
We’ll continue to do that. We’ve got several under construction, but I think looking for acquisitions that are operating today is going to be something that we also want to really prioritize and fortunately, Kelly and I both come from a background where we’ve seen that work really well over a long time horizon. And I think the disruption in the marketplace certainly that we’re experiencing, others are experiencing, probably helps break some of those opportunities loose.
So, sitting here with a balance sheet that’s in pretty good shape, a lot of cash and capital ready to deploy if we have attractive opportunities. And then a market that might be maybe becoming a bit more rational in terms of pricing expectations as the world returns to normal is a pretty powerful setup and I think we’re really excited about that. We’ll talk more about detailed stuff next quarter, but that’s probably a good start for now.
Steve Dyer
Okay. Yes, that’s helpful, sort of leads into my next question around, sort of general capital allocation, sort of your background in organizations. There’s always been a very structured, specific, disciplined framework. And as you noted, you’re inheriting a nice balance sheet a lot of different options with that. Are you able or willing at least at this early point to kind of talk about how you view capital allocation going forward in terms of the different priorities and strategies?
John North
Yes, absolutely. We were, I think pretty aggressive repurchases of our stock and have continued to do so through our quiet period as evidenced by the disclosure we made around purchasing stock through basically yesterday. The average price paid has come down a bit. We have a pretty specific format and framework that we’ve used pretty successfully in the past in terms of repurchasing shares in greater quantities if price falls.
And I think the story is a little bit misunderstood, if I’m honest. I mean, we’re trading at a pretty cheap multiple in my opinion, especially relative to where private transactions seem to be clearing the marketplace. And so, we have opportunity to deploy capital accretively there and by ourselves as opposed to a different acquisition we have to integrate. That’s a pretty easy decision.
And the cheaper the stock is, the more conviction I have is that’s where we should focus. Conversely, we really want to build scale of the organization. I think there’s real network effect and benefits to having more roofs. And so, it’s a balance between those, right. We’re going to continue to invest in the organic business. I think there’s opportunity to drive additional revenue some capital investment in our existing footprint.
I think we’ve maybe been a little bit starved for some capital in the past, relative to running the company for operations as opposed to a financial return. So, I think that will be third piece of it, but I think mostly what you’re going to see is hopefully some really great acquisition opportunities. Some greenfields here and there where they make sense and then pretty aggressive share repurchases if the market continues to either not appreciate or understand our story, which certainly looking at the share price $12 and change I think has to be true. So…
Steve Dyer
Yes, I would agree. A couple of quick ones just on the quarter more, sort of micro questions I guess, and I’ll give them to you both and then wait for you to listen or wait for you to answer. First, as it relates to inventories, obviously going from arguably the most robust period to something softer, sort of still probably TBD, where are your inventories relative to where you’d like them and feel free to give any color on used new aged versus not etcetera?
And then secondly, wondering if you can give same store sales that’s something that historically the company has never done, which I’ve never really understood and isn’t really industry practice, but I’m curious as to if you’re able to do that yet? Thanks.
John North
Yes. So, the second question is probably easier than the first. Take a look at our press release. I think you’ll find there is pretty robust disclosure there. I know it’s earnings season, there’s lots going on. So, when you guys have a chance to take a look, let us know if there’s other disclosure would be helpful, but we’ve tried to be a lot more robust and transparent. And that’s really a strategic thought on our side. I mean, we want to be easy to understand and we want to be accountable to performance. And so, we’re trying to really lay stuff out in a way that hopefully demonstrates that, builds credibility as a management team to our investors.
In terms of your first question on inventory, I think correctly prior to me even arriving, the strategy was around making sure our inventory is healthy. And I think that’s an important distinction. It’s not just about shrinking the inventory, it’s also about having the right stuff. And I think that’s a nuance that I’ve learned and we’ve observed in the automotive space for a couple of decades. And yes, you want to have less units and there’s some seasonality, but there are minimum levels that you need. And one maxim that is abundantly true is that you don’t have the stuff, you don’t need to sell, right.
So, we may end up having to discount some things because we’ve got more inventory than we would like, but that’s preferable to not be able to make a sale because you don’t have something on the ground. And so, I think we’ve been balancing that. We’ve been really focusing on working through prior model year stuff. I think the used opportunity is a big one and I know our operations team is more focused on that. And I put emphasis on that since I’ve arrived. And certainly, when you see our unit sales on a same store basis, down 15%, almost in use, I think that’s a bit of an opportunity.
We’ve definitely seen a little bit of margin pressure as we’ve been working through some of the older stuff, which is good. And I think we’re in a healthier spot. We do have pretty decent operations in the south and the [indiscernible], right? So, we’re in Florida, we’re in Arizona. And that seasonality is a little different. And so, you want to be prepared for the winter too. And so, I think we’re in a good spot.
I think generally the industry seems to be a little bit more rational than they have been in the past. And I think that starts with the OEMs in particular who seem to be managing this maybe better than they had historically. And I think you’ve heard that from others in the space, not just us, but that seems to be holding true this time. And I think October was maybe a little better than we’ve expected, right. I think things have held in with the consumer more than I think people initially feared in the summer and I think that’s been something we’ve been reacting to and can manage through pretty appropriately.
So, I’m comfortable. I think we’ve got some – still some moves to make. We’ve got some stuff that we can’t sell because it’s under recall and we’ve got some prior model year stuff we need to continue to work through, but the team is really focused on that and we’ll get our arms around it.
Steve Dyer
Got it. Thanks. Good luck, John.
Operator
Your next question comes from the line of Mike Swartz from Truist Securities. Your line is open.
Mike Swartz
Hey, good morning everyone and good to hear from you. Just a couple of quick questions. One, just looking at the comparable unit volume for new, I think it was down around 3% during the quarter. Industry is down closer to 20%, maybe give us some sense of context maybe even of why you outperformed the industry to such a great degree during the third quarter?
John North
Yes, I think it was really our operations team and a pretty concerted focus on trying to get our inventory healthy. If you look at our wholesale unit volume, it was up nearly 100% on a same store basis. And I think we made the decision to de-prioritize the used side of the business to get out of stuff that was coming on trades and really to try to turn customers onto the new stuff and get the inventory healthy.
We did some discounting. Certainly, the gross margins came down as a result, both in new and in used, but I think that was all designed to make sure that we were in a really strong position in terms of having a lot of model year 2023 stuff on hand and then the allocated product that we get from certain OEMs is in good shape and we’re ready for this winter that’s coming.
I mean Tampa is probably a third of our business, that one location. And they’ve got a gigantic show coming in January and so we won’t be prepared for that too. So, I think those were the dynamics in the market and just the focus. We’re proving that we can move the business when we need to, which is encouraging.
Mike Swartz
Got you. Very helpful. And maybe relative to years past and I know the past couple of years have been extremely abnormal for this industry. But I mean how do you think about inventory turns, whether that’s new, whether that’s used, or just a blended average? Maybe relative to where the company sat prior to the pandemic?
John North
Well, I think it depends. It’s hard to give a generalization because we operate stores and places as diverse as Minnesota and Florida. Your seasonality patterns, your traffic patterns are very different. And traditionally, as you have a more robust network, I would expect to see inventory build in the spring into the summer and then typically shrink in the fall, but that will be the exact wrong thing to do in Florida for example.
So, we’re a little bit unique in that way, probably a little bit more balanced right now as we have locations that may change. We’ll have to address that as we get there, but broadly speaking, I think you’re going to see our inventory levels probably go up. I think as I mentioned a moment ago to Steve’s question, if you don’t have the stuff on-hand, you can’t sell it.
And I think that’s a lesson that we’ve learned and particularly if we want to unlock opportunities and use and to attract a different customer and offer a different payment option for people who maybe feeling higher interest rates, that sort of thing. You need to have a little bit more diversity in your inventory.
So, I would expect to see those numbers go up a little bit. Obviously, there’s a cost to that relative to the floor plan, and certainly with rates going up, that’s a further burden that we’ll have to balance, but I think pretty universally if you talk to our store leaders, they all say they’d rather have a little bit more inventory than they have historically and we’re very much of a mindset to let the store leaders have a little bit more autonomy and discretion and how they run their business because ultimately they’re the ones that know their customers and their markets the best.
And I think that’s a little bit of a change in how we’ve approached in the past. So, I would expect to see turns, probably go down a little bit rather than up, but we’re comfortable with that. That’s part of the business. And if you look at some of our competitors, their churns are at the 2x level even, right. So, I think 2.5 or something like that isn’t [totally bananas] [ph].
Mike Swartz
Okay. That’s helpful. And then maybe one last question. Just on the decision to add the sales department or function to the Houston service facility, maybe just walk through the reasoning behind that and then maybe talk about the working capital investment that was needed for that as well?
John North
Yeah. I think there is a pretty rich history that any type of automotive dealership business typically needs to sell stuff and then either to service it or to finance it. And I don’t care if you’re talking about [CarMax] [ph] or you’re talking about automation or you’re talking about Lazydays. I think there’s been a lot of people who’ve tried to prove and correctly prove that you can’t do one or the other, they typically work together and you need the durability of the service or the financing business and you need the cyclicality of the sales business to really have a business that produces the right kind of financial outcomes.
I think the Houston example was experiment. The company had undertaken before I got here. And they had decided to add the sales operations before I got here. So, this is not anything to do with me. But I agree with the conclusion. I think the opportunity to add some brands there and sell some new stuff is wonderful.
We spent a little bit of money to augment the facility. Certainly, there’s a working capital on the used vehicle floor plan side because not all of that is a 100% financeable, but the new side is a 100% financeable. And so, really it’s a one-time capital call in terms of let’s call it a low seven figure number to do something with the sales department and then we’re off and running.
So, pretty excited about that. We’ve got a great leader down there that’s fired up and that RE market is a really good one. The dealership itself is on the way up to Austin, outside of Houston. And so, I think it could be a wonderful opportunity for us really to plan a flag in Texas, which is one of the biggest states for RV sales in the country, right? So, I think it’s important for us to have a footprint there and hopefully we’ll find more opportunities in the State of Texas in the future.
Mike Swartz
Great. Thanks a lot.
John North
Thanks.
Operator
And there are no further questions at this time. Mr. John North, I’ll turn the call back over to you for some final closing remarks.
John North
Thanks for joining us. I’ll talk to you soon.
Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect.
Be the first to comment