Despite a challenging selling environment, OneWater Marine (ONEW 4.82%) enjoyed a 4% revenue increase in its current fiscal year's third quarter, which ended June 30. This recreational boat dealer purveys new and pre-owned leisure boats and yachts in addition to providing maintenance, insurance, and financing services.

Although sales grew, OneWater's net income for the quarter was cut nearly in half versus last year -- and this hit the stock price, sending it sliding 27% in the past month. Let's find out what happened and whether this consumer discretionary stock is worth buying in today's market.

Recent acquisitions helped fuel sales

The Georgia-based company operates high-end boat dealerships across the U.S., and seeks to acquire and develop more stores in healthy markets. In addition to selling the latest models of premium boats, OneWater also provides repair and maintenance services for them.

Revenue for OneWater Marine hit $594 million in fiscal Q3 -- 4% higher than the same period in 2022, which was by all accounts a banner year for American boat sellers. It also marked a new, all-time high-revenue record for its third-quarter period. 

Given the "deteriorating selling environment," as CEO Austin Singleton described it in OneWater's Q3 earnings release, flat same-store sales can be considered a bright spot. However, Singleton also emphasized that the transition of the marine industry from exceptional heights "back to historical norms" has occurred faster than expected.

New boat sales fell by 1.4% to land at $372 million, and pre-owned boat sales increased by 14% to reach $111 million. The largest gains were observed in OneWater's parts and service business, which grew 23% last quarter and brought in $92 million.

During the company's earnings call in early August, CFO Jack Ezzell explained that parts and service gains were "driven by the contributions of our recently acquired businesses and dealer operations." Now up to 100 retail locations and 11 distribution centers as well as multiple online marketplaces, OneWater Marine has acquired 17 companies in the last five years.

Profitability fell sharply

Although sales saw modest gains in Q3, net income dropped a staggering 48% versus the same period in 2022. The company's cash balance also stands at less than half of what it was a year ago and is now a mere $45 million.

Interest rates proved to be a major headwind for OneWater Marine last quarter in more ways than one. First, due to higher rates and increased borrowings on company facilities, interest expense rose to $17 million -- up from just $4 million last year. Rising interest rates also impacted consumer sentiment and ultimately buying behavior, which resulted in flat finance and insurance income last quarter.

Overall, OneWater's gross profit margin slid to 27% last quarter, down from 32% a year ago. Gross profit fell 13% and finished the quarter at $159 million. Ezzell explained that these decreases were "driven by the normalization of gross margins on boats sold," but that "investments made in the service parts and other businesses have softened the decline."  

Signs point to a retail slowdown

Looking ahead, Singleton reported that he and his team had grown "increasingly cautious as demand signals are pointing toward a retail slowdown." For example, amid the prime selling season, traffic slowed and the industry endured declining sales.

As summer winds down, Singleton now worries that potential "customers may delay their purchases, especially because inventory is plentiful and there may be better deals to be had in the spring."

Given what could prove to be a slow fall and winter, OneWater lowered its full-year guidance and is now expecting flat same-store sales (down from flat to mid-single digits) and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) between $160 million and $170 million (down from $200 million to $225 million). 

Is OneWater Marine stock a buy?

I wouldn't call OneWater stock a buy today, but it could possibly be one in the near future. For starters, its dealerships have executed well on turning over and balancing existing inventories. By winter, the company will have a good supply of 2024 inventory and expects orders from retailers to start ramping up.

Second, and more long term, OneWater's "aggressive expansion strategy" should continue to bring in more profitable dealerships and facilities. According to Ezzell, "The M&A pipeline is robust and deals are beginning to look very attractive." Investors should watch future earnings reports to ensure that sales continue to grow as profit margins recover.