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Lazydays Holdings, Inc. (NASDAQ:LAZY), while starting to make some improvements on the inventory side of the business, still faces some difficult macro-economic conditions that will continue to be a headwind in 2023. Probably the largest factor is higher interest rates, which is causing some consumers to change their buying habits.
With a new CEO that has been at the company for only a couple of months, and a newly installed CFO, there will be a period of time in learning the company and how it operates and competes in the RV sector.
In the near term, the company faces challenging times from higher interest rates and a retail environment that appears to be slowing down. While the travel and leisure market has shown some resiliency, how long that will be the case is the major question going forward, based upon how long the recession continues on and how deep it goes.
In this article we’ll look at some of the recent numbers from the earnings report, the share price movement of the company and what it implies, the general strategy laid out by management, and why it’ll take patience for those invested in the company for the long term.
Share price movement
From March 30, 2020, when the share price of the company traded at approximately $1.50 per share, the stock started on a nice run, hitting a ceiling of a little over $25.00 per share in April through August 2021, before starting its pullback where it hit a 52-week low of $11.25 on July 5, 2022, and has traded volatile since then.
One important thing to note concerning its share price is it appears to have found a bottom of about $11.50 per share, having a triple bottom at close to that level since its July 5, 52-week low.
Since October 20, 2022, when it last traded at about the $11.50 per share mark, the share price moved up and plateaued at a little under $15.00 per share, and has dropped back to trade in the $13s since then.
Based upon its share price movement, it looks to me like it has found a bottom in the mid-$11s, reflecting I believe, the idea investors believe the worse may be over for the company, as it takes steps to boost sales by adding inventory, building more stores, and looking for attractive acquisition candidates.
Some recent numbers
Revenue in the reporting period was $334 million, up 4.7 percent year-over-year. For same-store sales, overall revenue was down $15.2 million.
Revenue from new vehicles was $203 million, with pre-owned revenue of $97 million.
Not including wholesale units, total unit sales in the quarter were 3,712, up 103 units, or 2.9 percent from the same quarter of 2021. Same-store unit sales not including wholesale dropped to 274 units, a decline of 7.6 percent year-over-year. For new units, the average selling price was up 3.4 percent, while the average selling price of pre-owned units fell 4.8 percent.
The results from same-store sales were from the impact of Hurricane Ian on Florida, which the Miami market itself accounts for about a third of the company’s business. Management believes this is only a temporary situation coming from the company’s inability to deliver units to Florida at the end of September. The impact on full-year results is expected to be minimal.
As for its Finance and Insurance (F&I) revenue, that dropped to $18.6 million, down 7.7 percent from the same quarter of 2021, while same-store F&I fell 15.5 percent. The decline was driven by an increase in consumers opting to buy with cash because of the high interest rates. That headwind is likely to continue as interest rates continue rise, even if the increases start to be smaller in size.
Revenue in service and repairs and other was $14.4 million, up 12.2 percent year-over-year. On a same-store basis, revenue from service and repairs was $13.3 million, up 3.5 percent. Under current market and interest rate conditions the company is likely to see those numbers climb, as RV owners wait to upgrade until the cost of financing comes down.
Gross profit in the quarter was $79.7 million, down $9.9 million from last year in the same reporting period. Gross margin contracted to 23.9 percent, a decline from the 28.1 percent last year in the same quarter. With the intent of increasing available inventory while discounting the old, management expects margins to be lower for a period of time.
Net income in the quarter was $7.7 million, or $0.35 per share, compared to $31 million, or $1.16 per share year-over-year.
At the end of the quarter LAZY had cash and cash equivalents of $100.8 million, with available credit from its facility of $61.7 million.
Strategy going forward
In the near term, the general strategy is to move its inventory from the prior year in order to make room for 2023 inventory. That has resulted in the need to discount, which in turn put downward pressure on margins. That should start to improve in the first calendar quarter of 2023.
Management is also focusing on getting more out of used F&I, along with its service business, which again, I think is going to generate more revenue as more people go with improving the units they own rather than buy a new unit in the current high interest rate environment. As mentioned above, some customers are mitigating that by paying cash for new RVs, but many aren’t able to do so. For that reason, F&I revenue on used units and service revenue on units currently owned by customers should both grow in the quarters ahead.
Management sees this as a way to generate more consistent revenue throughout the year and reduce volatility in its performance, rather than focusing solely on its seasonal sales business.
If that is an accurate assessment, the good news is this is likely to happen even as the company continues to increase the number of new units sold, albeit at a more modest pace in the short term.
Even though the company plans on continuing to grow organically by opening new stores, its primary focus for growth is by means of acquisitions. Prioritizing that under current market conditions within the RV sector is a good strategy, as there should be a number of opportunities that present themselves that will have an immediate impact on the top and bottom lines of the company.
CEO John North said the current disruption in the marketplace should result in some good acquisition opportunities. Its strong cash position will allow it to strike when these opportunities arise, which presumably are close to happening.
While there is potential to improve the performance of its existing locations, it would result in, at best, incremental growth. But acquisitions, such as Dave’s Claremore RV in Tulsa, Oklahoma and adding sales operations to its Houston, Texas service store, will have far more impact on the company’s performance, with the combined revenue from the two expected to add over $60 million in annual revenues. It’s not hard to see that a few more of these types of deals would have a dramatic effect on the performance of LAZY.
I think it’s vital for the company to diversify its revenue streams geographically, when considering the exposure risk it has in the Miami market, which accounts for about a third of the company’s sales. That’s a positive in good times, but definitely a negative when weather events like Hurricane Ian weigh on the results of the company.
Conclusion
At this time, LAZY operates somewhere in the middle of the RV pack, with some of its competitors having 100 stores or more, and many of them less than the current 18 stores LAZY operates.
With that in mind, management wants to scale the business to compete near or above the 100-store footprint some of the market leaders have, and the combination of building its own stores while acquiring others should accelerate that process, with each added store increasing scale, lowering costs and margins over the long term, while boosting its revenue stream.
This is going to take time because there are no quick fixes in the RV industry.
In the near term there could be some more downward pressure on the share price from margin contraction as it moves through its older inventory, but as the company emerges from 2022 it appears poised to grow at an incremental pace in the near term, based upon the unknowns associated with the recession, along with uncertainties on how high interest rates will climb, even though the pace of the increases are likely to slow.
For those reasons, the share price of the company could take another dip, but probably not below the double-bottom of $11.50 it has traded at over the last six months. Taking that into consideration, for investors looking for a better cost basis than currently reflected in the share price, dollar-cost averaging would be the best way to take a position in the company, especially for those that believe its shares will be under pressure over the next quarter or two.
Longer term, I think LAZY will be a profitable holding for patient shareholders, as management has made it clear that with its strong balance sheet it’s going to deploy that capital on acquisitions, new builds, improving the performance of its current stores, and if the market doesn’t see the value of what it’s doing at this time, buying back more shares.
However it deploys its available cash, I see the company entering into a long-term growth phase that should generate solid returns for shareholders over time.
All of this assumes the new management can execute on its strategy, something it has yet to prove.
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