RumbleON: Probably Has Further To Go Before Hitting Bottom (NASDAQ:RMBL)

RumbleON (NASDAQ:RMBL), which provides in-store and digital sales of motorcycles, cars and trucks, as well as providing transportation services between dealerships and auctions via its Vehicle Logistics segment, has been getting hammered over the last couple of years, hitting a high of about $64 per share in March 2021, then plunging to a 52-week low of $6.63 on November 25, 2022.

Going back further, it was trading at the heady price of $220.00 per share in September 2018, before beginning its long descent to where it’s trading today.

The major challenge facing the company at this time is the changes in the used auto business, resulting in compressed margins which is hitting the bottom line of RMBL, as evidenced in its latest earnings report where it missed EPS by a hefty $0.56.

Management has notably said it’s going to buy less vehicles going forward, as it continues to focus on its core Powersports segment, which is where the future of the company lies.

In this article, we’ll look at its latest earnings numbers, how the company views the wholesale used auto market, and the steps it’s taking to further transition to primarily serving the Powersports segment.

Some recent numbers

Total revenue in the third quarter was $470.3 million, down 13.9 percent from the prior quarter, coming from the 40 percent drop in revenue from its Automotive segment, which fell from $105 million in the third quarter of 2021 to $70 million in the third quarter of 2022.

On the other hand, revenue from Powersports soared from $83 million in the third quarter of 2021 to $291 million in the third quarter of 2022. For the first nine months of 2022 Powersports generated $859 million in revenue, up from the $121 million in revenue in 2021. The big increase in year-over-year numbers came primarily from its acquisition of RideNow.

While a much smaller part of the company, the Vehicle Logistics segment jumped from $10 million in sales in the third quarter of 2021 to $15 million in the third quarter of 2022.

As RMBL continues to cut back on its automotive business, it should start to improve the company’s bottom line, although it will also decrease revenue for a period of time.

Gross profit in the reporting period was $116.3 million, down $15.7 percent from the prior quarter. Gross profit margin in the quarter fell to 24.7 percent, down from the 25.3 percent in the second quarter of 2022. Part of that came from the over 60 percent drop in gross profit from the Automotive segment, along with supply demand imbalances that have continued to inflate GPU. Excluding Automotive, gross profit would have come in at 28.6 percent.

Adjusted net income for the quarter was $4.4 million or $0.27 per share, missing estimates by $0.56. Adjusted EBITDA was $25.7 million, a decline of 42.1 percent from the previous quarter, primarily from lower contribution from Automotive and a slight decline in gross margin in its Powersports segment.

At the end of the reporting period the company had, including restricted cash, $49.2 million in cash and cash equivalents. It also had a revolver of about $193.8 million.

Its Powersports and Vehicle Logistics segments are projected to grow in the fourth quarter and for full-year 2022, but with its decision to “explore strategic alternatives” for Automotive, it expects its contribution in revenue, volume, and gross profit to continue to decline.

Automotive segment

RMBL is transitioning away from its Automotive segment because of the changes in the way wholesale autos are now distributed. Among the other recent negative catalysts were an increase in the cost of freight, climbing wholesales costs and “unstable valuations.”

The changes in how redistribution on the pre-owned, wholesale side of the automotive industry is directly related to technology, and it has been happening for several years, but when the pandemic hit it accelerated the process.

The key thing to understand there is this was already a trend in progress before COVID hit, and the company doesn’t believe that market will ever return to the way it was. Now, companies are using technology to sell vehicles upstream,

Since RMBL believes the structural changes in the wholesale auto business are permanent, it’s “exploring strategic alternatives for this segment.” In the months ahead management says it will start to execute on plans associated with those alternatives.

Whatever it is the company decides to do, Automotive will be a headwind in the quarters ahead.

Powersports, demand and economics

The company was very clear that demand in Powersports was showing no meaningful decline, but that has to be understood in the context of the current economic environment and the industry.

For example, it’s one thing to measure demand from the point of view of people visiting showrooms and online traffic, it’s a totally different thing to convert that demand into sales.

The point there is some inventory is increasing in costs at the same time interest rates are climbing, essentially pricing some potential customers out of the market. So, while demand can legitimately be said to remain solid, the reality on the ground is demand can’t, in many cases, result in sales if people interested in buying can’t make the numbers work for them. And when asked about it, CEO Marshall Chesrown said over 60 percent of sales are done via financing. That suggests customers with less credit and/or disposable income aren’t going to be able to afford to buy even when they want to, until the current pricing and interest rate environment becomes more favorable to them.

For that reason, it’s highly probable, when combined with declining sales in Automotive, that the company is likely to underperform for at least a couple of quarters when including the fact this is the general offseason for Powersports products.

On the positive side, in regard to used inventory, which is the key to its model, according to management, it has secured a $75 million “inventory financing credit facility from JPMorgan Chase” for the purpose of used in its Powersports segment.

That could provide a wider range of inventory that may include some lower cost motorcycles that would be affordable for enthusiasts looking for low-cost options.

I think there still be some pressure from expected ongoing increases in interest rates and prices in at least the next couple of quarters, so while some lower-priced products could offset some of the higher pricing can costly financing, it’s not likely to completely do so.

Conclusion

RMBL is an interesting company that does have a lot of upside potential, but there is still going to be a period of growing pains until it gets its technology upgrades in place which will provide a more centralized and even pricing system and product mix that will improve the customer experience while benefitting the company’s performance.

Even though a high percentage of people will prefer to buy after seeing the product on location, the inclusion of a compelling digital experience will be a key part of them making a decision when they decide to go take a look.

On the other hand, there are still a growing number of consumers that are very comfortable with buying high-end products on the Internet, and consequently, RMBL should improve Internet sales once the website is where the company wants it to be.

The main question in the near term is how much the impact on declining Automotive sales will have on the company, how much demand in Powersports can be converted to sales, and what the company ends up doing as it explores Automotive options.

The bottom line to me is RumbleON remains a work in progress and is probably going to have a few more bumps in the road before it finds a bottom. I think the company has helped investors see the type of expectations they should have for the company in the near term, yet there are remains a lack of visibility on some aspects of the business that only will be resolved over the next few months, by which I mean how much Automotive will play in the future of the company, and in which way.

For those reasons it’s hard to know if RMBL has hit a bottom yet, or if it has more to go before it finds a foundation it can work its way up from. I think it’s going to take a couple more quarters to find out based on the current macro-economic conditions the company faces, as well as internal challenges it must solve before being able to deliver consistent progress and growth.