RV Retailer’s Debt Ratings Outlook Revised To Negative

“We expect consumer spending will align with real wage growth in 2024 (which has been muted for the past year) as consumers have used up a significant portion of excess savings that had built up during the pandemic. Meanwhile, we anticipate higher costs of capital and slower growth will result in slower hiring and an uptick in unemployment. While these expected developments could result in incremental disinflation in 2024, our economists still expect another 25 basis point (bps) interest rate hike in December 2023 and that rates will not come down until the second half 2024.

“The resulting macroeconomic backdrop poses downside risks to our base-case forecast for RV Retailer because RVs are a highly discretionary purchase that are typically financed over 10-20 years. Buyers may continue to stay on the sidelines through 2024 if interest rates on loans remain high. The interest rate equation for those trading in used RVs is also impacted by the fact that the vehicle the consumer currently owns was likely financed at a much more attractive interest rate.

“We revised the outlook to negative due to a spike in leverage above our 5x downgrade threshold over the next several quarters. Our leverage forecast is based on our expectation of stabilizing retail demand for RVs in the second half of 2024 and an increase in gross margin and reduced selling, general, and administrative (SG&A) expense–as a percent of revenue–in 2024. We expect same-store unit sales on both new and used RVs to be flat to down low-single digit percent in 2024. We also expect mid-single digit declines in average selling prices next year. While we do not anticipate the level of discounting required to clear out aged inventory throughout 2023 will repeat itself in 2024 given the company is entering the new year with a more favorable mix of product, we expect the industry at-large to emphasize lower price point models in order attract new buyers. The company also increased aged inventory reserves and took losses related to the summer 2023 flood that occurred in Vermont, which we do not expect to recur in 2024, and as a result we believe gross margins could improve by approximately 100 bps-200 bps.

“Additionally, we believe that rapid increases in consumer financing rates, high inflation, as well as a pull forward of demand during the pandemic led to an exaggerated decline in retail demand in 2023. There are macroeconomic downside risks to our base case, but we expect retail demand will normalize, albeit at lower levels in 2024, as inflation eases and consumers adjust to the new interest rate environment. Retail sales of new RVs fell precipitously through the third quarter of 2023. RV Retailer’s unit sales of new and used RV’s were down approximately 23% and 16%, respectively. At the same time, gross profit per unit deteriorated meaningfully for new and used sales as the company took measures to clear out its aged inventory of 2022 models and reduce its model year 2023 mix of product.

“Lastly, we expect the company will benefit from reduced SG&A expense in 2024 as the nears completion of its rebranding efforts.

RV Retailer’s acquisitive appetite is a risk factor. The company has an expansion and investment plan that includes store acquisitions, real estate purchases, and expansion of the servicing and repairs footprint. Since its formation in 2018, RV Retailer has meaningfully expanded its footprint of dealerships to be the second-largest retailer of RVs in North America in under three years. RV Retailer added 17 stores in 2022 and as of September 2023, the company operated 104 retail locations across 33 states, making it the second-largest RV dealer in the U.S. While the company has not made meaningful acquisitions in 2023 and has closed some underperforming dealerships, we believe that growth through acquisition remains a key piece of the company’s strategy going forward and RV Retailer might even take advantage of the difficult retail environment to negotiate acquisitions, possibly increasing leverage compared to our base case. RV Retailer’s sizable investment plan is a source of risk, particularly if the acquisitions are made during a period of poor RV demand.

“The economic cycle and potential declines in consumer credit availability could further slow demand for new and used RVs. RV Retailer operates in a competitive and highly fragmented industry. The company’s geographic footprint is somewhat concentrated and manufacturing supplier relationships highly concentrated, which is typical for RV dealerships. In addition, with an EBITDA margin historically in the high-single- to low-double-digit percentage range, the company ranks lower than most other rated leisure companies. Dealers typically vie for inventory when buying behavior is strong. In turn, RV original equipment manufacturers (OEMs) compete to manufacture and deliver inventory to satisfy dealers. In 2019, wholesale shipments outpaced retail demand and contributed to an industrywide correction and surplus inventory at dealerships, which led to discounting and temporarily pressured dealer margins. Such dynamics could introduce variability in revenue, EBITDA margin, and working capital if the industry does not match supply with demand. Business risks are partly offset by less volatile demand for vehicle parts and services, high margins from finance and insurance, and the company’s increasing scale. RV Retailer will increasingly benefit from scale efficiencies as it expands, if scale enhances its ability to manage inventory, extract cost savings, and raise capital to attract acquisitions.

“The negative outlook reflects our forecast for S&P Global Ratings-adjusted debt to EBITDA to remain above our 5x downgrade threshold for the next several quarters following steep declines in retail sales and margin compression in 2023. We could lower the ratings if do not believe the company’s can generate S&P Global Ratings-adjusted EBITDA such that leverage is reduced back within our threshold by year-end 2024.”