LAZY - Lazydays Holdings: Weak Trends And Lack Of Growth Catalysts

2023-06-14 18:09:09 ET

Summary

• In the recreational vehicles market, both volume pressure and average selling price pressure continue.
• Decrease in business volumes, coupled with inflationary pressure on operating expenses, has a negative impact on operating margin.
• I don't currently see catalysts for stock growth in the coming quarters.

Introduction

Shares of Lazydays Holdings ( LAZY ) are down 5.2% YTD. Despite the fact that the company is relatively undervalued, I believe that it is still not the best time to buy the company's shares due to weak trading trends and the lack of clear catalysts for growth in the coming quarters.

Investment Thesis

Currently, the company continues to experience demand pressure from both higher consumer spending on recreational vehicles (RV) in the past and relatively high interest rates that discourage leveraged RV purchases. In addition, I believe that the fall in prices in the secondary market may continue for several more quarters, which may continue to have a negative impact on business growth and operating margins in the near future. However, at the same time, the company is not expensively valued, has a long history and cash reserves, and the business continues to generate profits, so I stick to the HOLD recommendation, not Sell.

Market Overview

After outpacing consumer spending on the recreational vehicle during 2020 and 2021, we are now seeing a stabilization in the market. So, in addition to the general decline in sales of new and pre-owned cars, we also see pressure on prices. From the point of view of the reasons for the market slowdown, I would like to highlight: firstly, a gradual decrease in interest with the lifting of restrictions, secondly, a general decline in consumer spending in the discretionary segment, thirdly, the pressure of increased inflation on consumer spending and interest rates on desires to finance the purchase using borrowed funds.

Separately, I would like to pay attention to the used recreational vehicle market, where the decline in average prices outpaces the decline in prices for new recreational vehicles (price dynamics will be shown on the chart in the next section). I believe that during the pandemic and the growth in demand for domestic tourism, consumers preferred pre-owned vehicles due to their greater affordability. In addition, for many it was a spontaneous purchase. As a result, now we see an outstripping growth of offers for sale over demand and, as a result, a decrease in prices in the market. I believe this trend may continue for a few more quarters.

Despite the fact that during the Earning Call management said that the worst for the market is over, the company still finds it difficult to make assumptions about the volume of sales at the end of the year.

1Q 2023 Earnings Review

The company's revenue decreased by 21.4% YoY to $295.7 million. We continue to see a decrease in the number of new and pre-owned vehicle sales, as well as a decrease in the average selling price. Thus, in the segment of new cars, revenue decreased by 18.7% YoY due to a decrease in sales volumes by 12.8% YoY and a decrease in the average price by 6.8% YoY, while in the segment of pre-owned vehicles, revenue decreased by 27.2 % due to a decrease in sales volumes by 11.8% YoY and a decrease in the average price by 17.5% YoY.

In my personal opinion, it is worth highlighting the decrease in interest in the recreational vehicle as the reasons for the secondary market outpacing the fall, since some of them were a spontaneous purchase for the consumer during pandemic restrictions, and secondly, a decrease in demand due to macro headwinds, as a result of the volume of supply for sales leading to lower prices in the secondary market. In the chart below, you can see how the numbers decreased in Q1 2023 relative to Q1 2022.

Gross margin decreased from 26.3% in Q1 2022 to 21.6% in Q1 2023. The decrease affected both the new vehicle retail segment, where the gross margin decreased from 20.6% in 1Q 2022 to 13.2% in 1Q 2023, and the pre-owned vehicle segment, where the gross margin decreased from 24.2% in Q1 2022 to 20.3% in Q1 2023. The main contribution to the decrease in the gross margin was made by the decrease in sales prices.

The operating margin of the business decreased from 10.9% in 1Q 2022 to 3% in 1Q 2023, both as a result of a decrease in gross margin and as a result of an increase in the share of SGA expenses (% of revenue) due to scale down and inflation.

Thus, in my personal opinion, the reporting for the 1st quarter of 2023 looks expectedly weak, in view of the ongoing weak trends. First, we see both a decrease in sales volumes and a decrease in sales prices, especially in the secondary market. At the same time, rising operating cost inflation puts pressure on margins.

Risks

Demand: an increase in interest rates may lead to a decrease in demand for the company's products due to a decrease in the availability of borrowed funds, as a significant part of consumers prefer to use credit instruments to purchase RVs. In addition, lower consumer confidence and real disposable income could have a negative impact on consumer spending dynamics in the discretionary segment, especially recreational vehicles, which could put negative pressure on the company's business growth.

Pre-owned vehicle market: a continuation of the outstripping decline in prices in the pre-owned vehicle market may lead to pressure on revenue and business profitability, as the pre-owned vehicle segment accounts for about 28% of the total business revenue, and the gross margin in this segment business is the highest.

Drivers

Store network: the company is currently launching 3 new locations, which will be put into operation in the 3rd quarter of 2023. The growth in the number of stores contributes to the increase in the chain effect and economies of scale, which can support the operating profitability of the business.

M&A: the successful search and implementation of potential M&A under an adequate assessment can contribute not only to the growth of the chain of stores and, consequently, business growth, but also to increased synergies and growth in the operating profitability of the business.

Valuation

At the moment, the company is not expensively valued according to multiples. If we look at EV/EBITDA ('TTM') and EV/Sales ('TTM'), we see that the company is valued below the broader market. Some pressure is exerted by the forward values ??of the multipliers, however. In my opinion, this is due to the revision of the company's financial results for the worse in 2023, if the trends normalize, we will see normalization of the values ??in the forecast periods for 2024 and beyond.

Conclusion

Thus, in my personal opinion, now is not the best time to buy shares in view of the decrease in sales volumes and selling prices for both new models and models in the secondary market. I think it is necessary to wait for Q2 and Q3 2023 reports, where perhaps we can see signs of stabilization and normalization of the recreational vehicles market. Due to the company's relatively low valuation, I'm sticking with a HOLD rating for the time being, but I'll gladly change my recommendation if I see fundamental reversal signals in the recreational vehicles market.

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