“Selling RVs? Growth is slow, no exciting technology, it is simply too boring.”
“Wait, did I just say boring? Hmm…”
The word “boring” struck a chord with me. Not too long ago, I was listening to Charlie Songhurst, sharing his insights on Invest like the Best, a podcast hosted by Patrick O Shaughnessy. Charlie shared that when evaluating a business, we can plot it on a chart with two axes, one being boredom and the other being complexity.
The ideal situation is to find a business in the quadrant that has a highly boring narrative and an underlying business that is highly complex. Such businesses by nature, experience a lower supply of entrepreneurs and thus, incumbents are more likely to retain their stronghold, resulting in elevated long run returns.
By adding two more caveats, I think it adds clarity to the framework.
Caveat 1: Boring Narratives ≠ Boring Businesses
Caveat 2: Technology is not a precondition for complexity
After a few days of hardwork, I came to the conclusion that Camping World falls nicely in that magic quadrant. Selling RV has a relatively boring narrative, and the underlying business is surprisingly complex, with an intricate ecosystem comprising of RV sales, financing & insurance, maintenance & repairs centres, warranty plans etc… Before I share with you my rationale, let’s first understand what Camping World does.
Camping World? Who?
Camping World is America’s largest retailer of RVs with a national network of RV dealerships. In addition, they also offer a comprehensive assortment of RV related products and services, along with the industry’s most extensive online presence.
How Does Camping World Make Money?
Camping World operates with two reportable segments,
- Good Sam Services and Plan, and
- RV and Outdoor Retail
Good Sam Services and Plan
Good Sam Club is the largest RV enthusiast organization with over 2.1million members. It offers savings on a variety of RV products and services, discounts on affiliate Good Sam RV parks and benefits relating to RV lifestyle.
Plans and services are geared towards protecting, insuring, and promoting the RV lifestyle. They include services such as extended vehicle service contracts, vehicle roadside assistance, property & casualty insurance, and travel protection. Because Good Sam protection plans and programs are often purchased to cover a multiple-year period and are renewable in nature, this area of the business tends to generate high-margin, recurring revenue.
RV and Outdoor Retail
- Sale of New and Used RV
Camping World enters into dealer agreements with trusted manufacturers such as Thor Industries and Forest River. The business purchases new RVs at wholesale prices and resells them at a profit. Used RVs acquired from customers via trade-ins and auctions, are reconditioned and resold.
- Financing and Insurance
Camping World partners with third party institutions to provide financing and protection plans for customers who have decided to purchase a RV. Camping world receives a commission from each transaction and does not take on any of the underwriting and credit risks.
- Repairs and Maintenance
Camping World operates RV workshops that provides repair & maintenance services for RVs
- Good Sam membership
RV owners looking to join the Good Sam club, pay an annual membership fee of USD27. There are multiple pricing plans for Good Sam membership.
So… selling RVs can be complex?
Short Answer: Yes, when you are building a 360 degree ecosystem that serves all the needs of RV owners.
Long Answer below…
Well, the biggest misconception about Camping World is that it is just another RV dealer. On the contrary, Marcus Lemonis, CEO of Camping World, is building an ecosystem that touches upon all the necessary products and services throughout the RV lifecycle. This includes, but is not limited to financing of RVs, purchasing of outdoor gears, maintenance & repairs, installation of new equipment, renting out RVs, and selling used RVs.
If you don’t believe me, take a look at some of the numbers below!
More than just a RV Dealer!
While top line numbers seem to suggest that Camping World is generating most of its business from the sales of new and used RV, their gross margin tells a different story. You quickly realize that Camping World derives a significant portion of business from channels such and Financing & Insurance (F&I), and Products & Services. Consider the following diagram.
Ultimately, sales of new and used RVs accounted for 67% of total revenue but only translated to 39% of gross profit. On the other hand, businesses other than the sale of RVs, took up ~60% of gross profit. This can be attributed to the higher margin nature of F&I, and Good Sam service plans. F&I in particular, boasts a 100% gross margin. It captures 31% of total gross margin, 6% more than what RV sales account for.
Recurrent revenues within installed RV user base
In the recent earnings calls and investors presentations, Lemonis accentuated the “recurring*” nature of F&I and Good Sam revenues.
“It’s high margin recurring revenue that really caters to the installed community of RV owners that really have driven this industry for many years in the past and many years to come – 10 million RVers in the range.”
-Marcus Lemonis, 2020 Investor Presentation Earnings Call
Good Sam service plans such as warranties, roadside assistance, and travel insurances often span across a multi-year timeframe, creating a recurring source of revenue. F&I in a similar way, generates a recurrent revenue stream where millions of RV owners trade and transact with each other on the marketplace each year.
*Note: I tend to associate “recurring” with a regularly occurring and predictable pattern of revenue. Hence, I was initially the labelling of F&I as a recurring revenue stream. I believe the term “Recurrent revenues” would be more apt to describe F&I revenues given that they are regularly occurring but less predictable.
Attempting to grow Camping World into a business that serves the full stack needs of an RV owner, right from the initial purchase, to outdoor gears, repairs, upgrades, rentals and to the eventual sale of the RV? Yes, that’s going to be pretty complicated. Check out this cool video put together by Lemonis and team.
So what’s the plan?
Richard Rumelt, author of Good Strategy Bad Strategy, introduced the concept that the kernel of a good strategy contains three elements: a diagnosis, a guiding policy, and coherent actions. Using this framework, l tried making sense of all the new initiatives that Camping World has launched. Here’s what I came up with:
Diagnosis: Challenge of capturing and growing the market of outdoor enthusiasts
Guiding Policy: To give a holistic RV ownership experience
Coherent Actions to be taken:
- Digital Marketing and Demand Creation
In 2020, Camping World actively leveraged on their social media platform to engage with young buyers. In their Tik Tok account, the #CampingWorld of young adults sharing their camping experiences, generated 40 million impressions or engagements. Going forward, Camping World is doubling down on its digital marketing efforts, with a slew of partnerships with celebrities, sport events, and concert series planned for 2021. Generating buzz and excitement about the outdoor lifestyle in young buyers builds up a strong pipeline of future RV owners.
Aside from ramping up digital and social media marketing efforts to engage with millennials, Camping World continues to work with RV manufacturers to design lighter, less expensive, more easily towable units. This creates an alignment between digital engagement and affordability to own an RV unit.
- Expanding locations and high margin collision repair centres
To enhance the RV ownership experience, Camping World plans to strategically expand nationwide store locations and collision centres, thereby providing increased accessibility and convenience for RV owners. An expanded presence further benefits Camping World by enabling the company to service more RVs, proving to be a win-win situation for Camping World and RV owners.
“One of the things that improves that experience is the amount of time it takes to repair a coach, where to drop it off, what the fees are going to be and how the whole process works. They want more locations where they can have their unit repaired.”
-Marcus Lemonis, 2020 Investor Presentation Earnings Call
- RV Valuator – RVs as a financial asset
An exciting initiative that Camping World plans to roll out in 2021 is the Good Sam RV Valuator. The Good Sam RV Valuator capitalizes on Camping World’s comprehensive database of historical transaction to assign a value on RVs out there in the market. This is an exciting proposition as it transforms RVs into a financial asset, radically redefining the ownership experience. With such insights, it creates opportunities for RV owners to monetize their RV, driving increased transactions within the RV ecosystem.
“Now over the last five years we’ve seen how technology can change the way people can monetize their assets. A good example is Airbnb, right? You took these vacation homes and different investment properties and you’re able to pull them together on a piece of technology that allowed people to think about investing in property differently than they ever did before because there’s a platform to give them a return on that investment.”
-Marcus Lemonis, 2020 Investor Presentation Earnings Call
- RV Rental Platform – RVs as a financial asset
Another game changing initiative that Camping World plans to introduce in 2021 is the Good Sam RV Rental platform. Yet again, this provides another avenue for RV owners to monetize their RVs. While there are existing apps out there that allows RV owners to rent and transact with users, the Good Sam RV platform operates in a fundamentally different way from existing apps.
- The Good Sam RV Rental platform can charge a much lower fee structure due to the synergies it derives from rental transactions within the installed RV based. Renting an RV requires insurance and incurs repair & maintenance costs. All of which Camping World provides but existing apps do not.
- Customer acquisition costs is also significantly lower as they can latch right onto existing Good Sam memberships.
- While Camping World has no intention to get into the business of operating RV rentals, the rental platform serves as an avenue to mobilize idle inventory.
Putting it all together
Lemonis is squarely focused on delivering an enhanced RV ownership experience. All initiatives and restructures are introduced with the intention of creating an RV ecosystem that maximizes touch points across an RV lifecycle.
The introduction of the Good Sam RV Valuator and RV Rental platform are ingenious in my opinion as it A) paints RV ownership as an investment and B) expands the surface area for transactions within the ecosystem. A platform for ownership transfer and rental encourages the RV lifestyle and as owners/renters exchange units, it invariably entails inspection fees, maintenance fees, F&I. All of which are high margin, and recurrent revenues.
RV sales nonetheless, remains a critical component of Camping World’s business model. It serves as the ignition that fuels a series of transaction along the lifecycle of an RV. Building a 360-degree ecosystem binds and attracts new customers. It strengthens the transmission effect of each ignition (RV sales) into engine power (non-RV sales revenue), driving the very core of Camping World business.
Financials & Valuations
Revenue and Growth
Total Revenue (ttm): ~ USD 5.27bn
Gross Margins: ~ 28%
Average Revenue per Good Sam member: USD $1850
Total Good Sam members: ~2.1mn
Good Sam revenue contribution: USD $3.885bn ( ~74% of total revenues)
I will rely on a few metrics to determine how initiatives are performing and contributing to the overarching vision of building an RV ecosystem that enhances the RV ownership experience.
- Initiatives laid out to create more touch points for high margin businesses should mean that we see a gradual improvement in gross margins.
- Introduction of the Good Sam RV Valuator & RV Rental Platform should translate to increasing membership numbers for Good Sam.
- Subsequently average revenue per member should track higher with increased transactions within the ecosystem.
- While Camping World does not disclose retention figures for Good Sam, network effects should also mean that retention rate within Good Sam goes up. This is a figure that I hope the management can share in the future.
Camping World finances all its inventory purchases, taking on a significant amount of leverage. Moreover, Camping World issued over USD 770bn in new long-term debt since 2017 to acquire outdoor retail locations to expand their retail presence. When that strategy didn’t play out, it left Camping World with a heap of debt.
As of September 2020, it has outstanding debt of ~USD 2.5bn, including leases. Due to the significant amount of liabilities sitting on Camping World’s balance sheet, the equity component is pretty small ( USD 32mn) which I find a little worrisome.
One of Lemonis’ goal is to get leverage ratio down to 2x which will free up cash for paying down debt, making acquisitions, investing in technology etc… With the existing low interest rates environment, taking on debt looks incredibly cheap by historical standards. However, the margin for error shrivels with increasing debt load, rendering a business vulnerable to shocks.
Personally, I would like to see a much lower leverage level. The good news is that the company seems to be on track to generate positive FCF and long-term debt has been on a gradual downwards trend. Camping World’s leverage ratio will be something that I will be monitoring closely.
Market Cap: USD 2.6bn
Enterprise Value: USD 4.5bn
Free Cash Flow (TTM): USD 835mn, unadjusted (USD 435mn, adjusted for inventories)
EV/FCF Ratio: 10.50x
In my calculations, I made a slight adjustment to FCF. If you observe closely, you will notice that Camping World’s TTM FCF seems elevated relative to previous years. This can be ascribed to a decline in inventory levels as RV manufacturers struggled with productions amidst the Covid-19 lockdowns. To adjust for this one-off impact, I reduced FCF by USD 400mn, proportionate to the reduction in inventory levels.
Using conservative estimates (see below), I ran a simple, back of the envelope DCF Modelling and arrived at a target price of ~$68. This represents a 69% margin of safety on an already conservative model, which makes me feel comfortable investing in Camping World at current prices.
A Word on Management
“When I have skin in the game, my way is the only way your business will survive.”
–Marcus Lemonis, Chairman & CEO Camping World
The man has indeed lived up to his words! Lemonis owns a staggering 49% of Camping World and consistently uses his own money to purchase shares. In addition, he takes no salary and no stock options from the company too.
He doesn’t just have skin in the game, he literally has a limb or two in the game! I sleep well at night knowing that Lemonis is no mercenary CEO. However, it would be preferrable if the other senior management have a higher ownership percentage.
The management has also demonstrated its willingness to adapt to changing circumstances. When the Company realized that their prior strategy of expanding outdoor retail presence was not paying dividends, they made a painful decision in 2019 to abandon their focus on retail outlets and divert resources towards the core business – RVs.
Good strategy requires sacrifice.
The management has shown their maturity in acknowledging mistakes and cutting losses.
As Camping World seeks to enhance the RV ownership experience, it has set forth an action plan that A) seeks to redefine RVs as financial assets, and B) build a highly accessible network that caters to RV owners.
I am most excited by the introduction of the Good Sam RV Valuator and the Good Sam Rental platform. Not only does Camping World have a positional advantage in the introduction of these initiatives (due to historical transaction data and an existing pool of members), but these initiatives are also highly accretive to existing offerings as well. Nevertheless, such initiatives are nascent, and their success is not guaranteed. Monitoring the progress and execution of these initiatives will be imperative for investors of Camping World.
Financially, the company has shown progress this year, generating positive free cash flow even after adjusting for one off inventory declines. However, their debt-to-equity ratio is still at pretty high levels and should be closely watched.
RV transactions, a big portion of Camping World’s business also tends to be highly cyclical. Rising interest rates have a double whammy on the demand for RVs and inventory financing costs. However, I do applaud the company’s efforts to lower the cyclical nature of their business by creating and capturing business opportunities within the installed base of RV owners.
It goes without saying that the growth potential of Camping World is much lower than companies I usually get interested in. There is neither a secular trend that will accelerate RV sales in the future nor an exciting technology disrupting the incumbents. However, what I see is a company with high quality management, executing a thoroughly thought-out action plan to cultivate and capture a market of growing outdoor enthusiasts. And I believe that when a CEO has so much vested in the Company, he will fight every inch of the way to make sure the business succeeds.
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