The Problem for Camping World Isn't in Its Sales, It's in Its Buys

In this segment from MarketFoolery, host Chris Hill and analysts David Kretzmann and Aaron Bush weigh in on the results that RV maker Camping World (CWH -0.96%) recently reported. Earnings and sales figures did not meet the market's expectations.

But the story is not so clear-cut here: Its sales arc is going in the right direction, but its acquisitions have left it with operating expenses growing faster than revenue. Are the shares being punished by short-term thinkers? And should you buy into CEO Marcus Lemonis' long-term strategy?

A full transcript follows the video.

This video was recorded on Aug. 8, 2018.

Chris Hill: Second quarter profits for Camping World came in lower than expected, so did the revenue. When you look at the stock, David, it's close to a 52-week low. How much of a world of hurt is Camping World in right now?

David Kretzmann: That's the thing. When you actually look at the progress that the company is making, they're on a pretty good track. They sold a record number of RVs this quarter, they're on pace for a record year of RVs sold in 2018. They continue to see strong growth with their towable units, which were up 14%. They're seeing a lot of younger buyers who aren't waiting until retirement to hit the road, but rather starting with some of these less expensive units that you can just hook up with a trailer on your existing vehicle.

I think the issue here is, they continue to make some acquisitions to grow their store base. That's causing operating expenses to grow at a faster pace than revenue. So, you're seeing continued pressure on margins.

At this point, it's almost a jockey play. The CEO, Marcus Lemonis, is a TV star on CNBC. He has a show, The Profit, where he works with small businesses. I personally like his approach to retail and working with people, kind of a conscious capitalist type of person. He has a proven track record in the category. But, at this point, the company is relying on debt to make acquisitions, buy stores. In the short-term, that does hurt margins, because you're hiring more people, you're buying more inventory. But, if you're someone who believes in the vision of Marcus Lemonis and his track record, then I would think this might be a compelling opportunity for investors today. It might be another six to 12 months of some subpar quarters when it comes to profitability, but revenue was up 13% this quarter, they actually raised revenue guidance for the rest of the year. If you're a shareholder or prospective shareholder, you're really betting that the strategy that Marcus Lemonis has outlined makes sense. If you don't really believe in Lemonis or his strategy of acquiring mom-and-pop RV retailers or other retailers out there and lumping them into the Camping World brand, then you want to stay away from the stock.

Aaron Bush: To me, it seems mostly like short-termism, in the sense that they did miss revenue and EPS estimates this quarter, even though results were strong. They did lower their adjusted EBITDA outlook for the next year or so. But that's as a result of them reinvesting in what should very clearly produce more profits later.

But it's still a bit of a head-scratcher to me. Over the past couple of years, in 2017, the stock was on a tear, there was a lot of optimism. Then, this past year, it's been the opposite of that. If you look at the results, it's been steady performance. I don't know, David, what am I missing? Are there other reasons out there, besides just RV sales, that people are worried about?

Kretzmann: I think the issue is, last year, the company acquired the Gander Outdoors brand, formerly Gander Mountain. They kept about 60 locations of Gander Outdoors open. The market and investors were trying to figure out the rationale there. Obviously, that led to a huge uptick in inventory and pre-opening expenses, as you're renovating the stores and hiring people to fill those stores and support customers there.

Lemonis has basically said, that was a way for the company to accelerate its expansion into states where RV sales are huge. Those are states like Wisconsin, Minnesota, Texas and six others. They represent some of the top RV states, in terms of sales. It's a way for them to accelerate that, bring people into their Good Sam Club membership, which is kind of like AAA for RVs. You get RV support services, maintenance, insurance, things like that. It's a way for them to build a file and eventually sell more RVs.

But, up to this point, like Aaron mentioned, you're still in that investment mode, so margins are being pressured, cash flow isn't all that impressive right now. In the meantime, RV sales are at record heights. Camping World is the only national RV retailer. If you believe in those tailwinds toward RV, boating, and people getting outdoors in general, which has been a trend we've seen for several years, then I think you have to look beyond just one or two quarters with Camping World. The way Lemonis is positioning is to really become the dominant RV and outdoor gear retailer and brand in the U.S. But it'll take some investments along the way.

Hill: Quick last question on Lemonis. If he's the No. 1 reason to buy this stock in your mind, what's the danger of him leaving or being distracted? He has this CNBC gig. Has he been asked about this? Has he come out and said, "I'm committed to this, this is my No. 1 priority?" Because it sounds like, for as well as this business has done over the last few years -- if I'm listening to you correctly -- if he decides to leave next month, then this is less of a bull case for you.

Kretzmann: Yeah, if he left, I would be more concerned, especially because the company is relying on debt to make these acquisitions, especially the Gander Outdoors acquisition. Right now, they're sitting on $1.8 billion in net debt. It is substantial. That does amp the risk. Lemonis does own over half the company now through a holding company. He has by far the vast majority of his net worth in Camping World. So, I think the likelihood of him leaving is minimal. But, certainly, if he did take a step back or leave altogether, I would definitely see that as a risk.

Hill: In terms of the debt, would you say that the funding is secured?

Kretzmann: I sure hope so. RV sales are going up.

Bush: $420.

Kretzmann: Yep! [laughs]