Description

We think RMBL, the largest powersports dealership group in the US, is a LONG as we believe it will be sufficiently resilient during near-term macro bumpiness and has a compelling long-term strategy for value creation. Further, we believe COVID has created a durable tailwind to powersports participation / the industry is on a better long-term trajectory than in 2019. We think the levered equity could work handsomely on good execution, and think the shares are worth $25+ near-term and $50+ longer-term. Recent short writeup provides good background but we (obviously) differ on a few key assumptions which we've tried to flesh out in the below. 

Background / Strategy

RMBL has certainly had a checkered history as a public company. Though generally a value destructive period, pre-RideNow RMBL successfully developed one key capability—buying used powersports vehicles directly from consumers. While RMBL was able to acquire well, it largely failed at internet DTC retail, instead monetizing most of the acquired product in the wholesale channel (dealers / auctions). The net margins were not compelling. 

Through the RideNow and Freedom transactions (#1 and #2 dealership groups, respectively), RMBL has married industry-dominant used vehicle sourcing with the largest brick-and-mortar footprint in the industry, which we view as creating huge value.  Early success in adding used volume to the existing RideNow and Freedom sites is evident in their 2022 results, where, by Q3, they had achieved a 1.3 : 1 ratio of new : used retail units, close to their long-term aspiration of 1:1. For context, the legacy RideNow footprint retailed about 25% used vehicles, almost all trade-ins, as opposed to what RMBL is providing the dealerships with—high quality used units selected specifically for their retail gross margin potential. Beyond the brick-and-mortar dealer network, RMBL has started to unlock a new retail channel, opening their fulfillment / distribution centers to the public. This model was first employed at RMBL's Orlando facility and it quickly became one of the top retail sites in the system. We believe there is an opportunity to employ this strategy across RMBL's fulfillment center footprint and to potentially expand these Carmax-like used-only superstores.

In addition to the used vehicle initiative, RMBL has several other organic growth / operational enhancement strategies. On the new vehicle side, it is finding that it can add new OEMs to existing locations, allowing its locations to outperform industry trends via broader product assortment. Further, it seeks to enhance inventory availability across the system by centralizing the receipt and storage of inventory at fulfillment centers, allowing a customer at any location or online to see all of the inventory available within the organization. This strategy is also central to being able to retail more units from a given location without overloading the showroom floor. Centralizing inventory goes hand in hand with another initiative, centralizing pricing of used inventory, which is currently set in a more "seat-of-the-pants" manner by individual dealers. Centralized used vehicle "no haggle" pricing represents a margin enhancement opportunity and enhances the customer experience, as demonstrated by increased volume and GPU in early pilots. 

Another interesting organic growth initiative is to focus on servicing as a differentiator and profit center. Service departments at powersports dealerships have significant backlogs and long turnaround times. By hiring more techs at the dealers and better retaining them and by moving tasks such as new unit assembly and used unit reconditioning to the centralized fulfillment centers, RMBL believes it can create enough capacity at the dealerships to work on high-margin customer repairs such that turnaround time will be measured in days, not weeks.  By repairing units quickly, we believe RMBL dealers will draw service customers from other dealers, which should feed unit sales over time.  

In addition to organic growth, RMBL has the best platform in the industry for continued roll-up of dealerships (next largest dealership groups have ~10-15 locations). The current environment, within a quarter or two, should enable very attractive tuck-ins / eliminate the guesswork of buying on inflated EBITDA, and we believe RMBL has sufficient liquidity to pursue these opportunities. There are opportunities to further diversify the business geographically and by product category via these tuck-ins. RMBL's used vehicle strategy gives it a lever to instantly improve performance of acquired sites. The almost unlimited legs a roll-up in this space could have also make RMBL a very attractive platform investment for PE, although we hope this doesn’t occur until the stock has had a chance to recover. 

Finally, while it is not a key element to our thesis, RMBL should soon be able to facilitate an end-to-end online transaction for consumers who are interested. 

Outlook

RMBL's organic growth strategy is important, as we believe it will allow it to outperform the industry in 2023, with used volume growth the key component. That said, we also think broader industry dynamics are misunderstood by those who forecast sharp new unit declines in 2023. 

On the new vehicle side, there is nuance to the industry's supply / demand dynamics during COVID. While COVID was a massive tailwind to the industry on the demand side, the industry also suffered from extreme supply challenges throughout much of 2021 and 2022. The confluence of these factors produced outsized GPUs on what was retailed; however, it also constrained new unit volumes, which were down at the industry level in 2022 vs 2021, and also down vs 2019 levels (the right way to think about 2022 is a year of many "missed" retail sales due to availability issues - not an inflated year). In particular, the peak riding season in 2022 coincided with the worst of the inventory issues, with Q2 2022 Harley Davidson retail units down -28% vs Q2 2021. PII saw similar declines of -23% at retail during Q2 2022, with Indian Motorcycle down low-40s % vs 2021. Industry off-road was down mid-teens % in that period, with industry on-road down mid-20s %. We think Q2 2023 (most important quarter of the year) should see new units up significantly y-o-y as seasonal demand meets the best inventory selection in years. Overall, we think OEM guides for flattish to slightly up 2023 new unit retail are valid and that RMBL’s locations should outperform this. For modeling purposes we opt to be more conservative (i.e., flat to slightly down). Illustratively, if Harley Davidson North America retail units are flat in 2023, this would still suggest 13% lower unit sales than in 2019, and the 2020-2022 3-year period saw 17% fewer units sold than the 2017-2019 3-year period. Given the demand tailwind, we view this as evidence of the supply challenges / available mix.

We do not dispute that margins on the new side are likely to compress materially—we forecast new retail GPU to decline from ~$3,200 / unit in 2022 to ~$2,400 / unit in 2023 (~25% of front-end margin lost). We also model a modest amount of GPU erosion in the used side, from ~$2,500 / unit to ~$2,200 / unit although we view this as easier for RMBL to influence through its various initiatives and through adept sourcing. In all, our margin assumptions lie somewhere between the base and downside case outlined in the recent short writeup. Dealer checks suggest that the primary "discounting" this year will be on some of the carryover / out-of-season product that was received too late in 2022, whereas 2023 model years should not require discounting to move. Something to keep in mind on GPUs—mix has been shifting to off-road, and side x sides are a particularly growthy category—these units typically carry higher GPUs than motorcycles. Another important piece of context on margins—2018 and 2019, which are often used as “pre-COVID” benchmark years reflected more severe excess inventory issues than we are likely to see in 2023, measured by days supply. On the Metric side, where margins were particularly low on new retail in 2018 / 2019, RideNow new vehicle days supply was 169 days in 2019 and 150 days in 2018.  

Coupled with a flattish to slightly down new unit assumption, we believe RMBL should be able to grow used units in a variety of market conditions, as this is a core initiative that is not yet fully ramped and it will have easy compares in Q1 / Q2, when dealerships generally did not have the amount of used inventory they started to carry later in the year (particularly the acquired Freedom sites, which adopted the RMBL playbook later than the RideNow sites). Our modeled 17.5% growth on the used side takes units from ~30,000 this year to ~35,000 next year. We think there are a variety of ways to get those additional 5,000 units retailed, and the # should prove conservative (i.e., perhaps the opening up of fulfillment centers as retail sites alone could drive this growth). 

Putting this together, while consensus for Q4 and 2023 is likely still high, we think this is largely implied in the valuation of ~4x 2023 consensus EBITDA. We see RMBL as capable of $100mm+ of EBITDA in 2023, which would keep it comfortably out of any covenant trouble. From there, especially if macro improves, we think RMBL can continue to play a leadership role and keep taking market share.

Below is a high-level forecast meant to represent our view of a “weak base case”:

Powersports Affordability / Financing

While a discretionary / larger-ticket purchase, we think that powersports are likely to outperform categories like auto, RVs, larger boats (vs personal watercraft) etc. This is due to the ASP of powersports products being relatively low, coupled with a customer that is generally pretty affluent and passionate. Further, we think the COVID tailwind to participation will be a sustained one (nothing crazy - just that there were newcomers in the last few years, and some portion of them will stick with it). The recent short writeup makes alarmist claims such as "RMBL’s core customers are largely finance customers who will see their monthly payment on a new or used powersports units double (or more) vs what was seen in 2021 and early 2022." We don't understand this, as a simple look at a financing calculator would suggest otherwise.

We played around with this tool on HD's website: https://www.harley-davidson.com/us/en/tools/estimate-payment.html and this one on Indian Motorcycle's website: https://www.indianmotorcycle.com/en-us/payment-calculator/

The 2023 Sportster S has an MSRP of $16,399, similar to RMBL's average ASP for a new vehicle. Harley Davidson's calculator defaults to showing this as a $324.64 / month payment assuming 60 months @ 6.99% APR. If we were to adjust this APR all the way to 0%, the monthly payment would be $273.32 / month, and at a 3% APR, it would be $294.67. 

Similarly, if we use PII's Indian Motorcycle's calculator, a $17,000 bike @ 6.49% APR for 60 months yields a $332.54 / month payment. At a 3% APR this would be $305.47 / month and at 0% this would be $280/ month. 

As you can see, given the relatively low-ticket vs a car or RV or boat, there isn't a crazy absolute increase in the monthly payment as a result of rate, particularly from the lens of the average powersports customer. On the margin, you may see some more cash purchases from those who are able / want to avoid interest leakage but when you think about what recent rate increases mean in practice, coupled with OEM and RMBL commentary (echoed by dealer surveys) that financing is still readily available, we don't see a financing or affordability crisis. In fact, ample availability of credit is a key reason you'd expect more resilient performance than 08 / 09 even if we do go into a deep recession—speaking to dealers who managed through those years, credit availability, not demand, was the primary issue. 

Further to the financing discussion—most of the promotions OEMs are offering so far in this "cycle" are interest rate buydowns, i.e., promotions on financing likely make the anyways minor monthly payment changes even less impactful.

Thoughts on Liquidity / Covenants

We are not convinced that Oaktree would have made this loan in 2021 on the thesis that fully anticipated gross margin normalization would cause a covenant bust that facilitated a lucrative loan-to-own play. Rather, our checks suggest Oaktree made this loan with extensive underwriting, continues to support the business plan, and is hoping to get paid through the fees and interest cost. Further, as the short writeup also acknowledges, RMBL has ample liquidity to navigate the environment, particularly considering the largely undrawn used floorplan facility and as evidenced by the voluntary $15 million debt repayment in Q4 referenced in their ICR remarks.

We think given the P&L sensitivity to margins and the possibility of a "deep" recession, it is not out of the question that RMBL has a breach; however, this would represent a downside case to us. While EBITDA resilience is one element of this, we don't think RMBL's used floorplan facility is properly understood. Since starting to ramp its used volumes, RMBL has financed the purchase of used inventory 100% with corporate cash, which is obviously a very inefficient way of doing things. Simply ramping the use of the used floorplan (into which existing inventory can be assigned, if RMBL wishes) will result in a release of that capital (equity in the used inventory) to the corporate balance sheet and will de-lever RMBL vs. its Oaktree covenants. If we assume the $75mm floorplan can be used to reduce corporate net debt by ~$50mm (should be doable, given “far less” than $20mm drawn as of ICR and $100mm of used inventory, also as of ICR), this means ~$75mm is the EBITDA level at which covenants become an issue, vs ~$85-90mm without considering this. One small modeling note—vs the recent short writeup, we use undiscounted face values of the debt vs the net amounts shown on balance sheet, as this is the way the covenant calculation likely works—this is why you'll see a slightly higher net debt figures on our end (we do assume that RMBL generated some of the cash it used for the LOC repayment, vs it being entirely cash on hand). 

In terms of whether the proceeds from the floorplan (or FCF) can be easily used to repay Oaktree in practice (if / as needed to make the covenant calcs work or to otherwise reduce interest expense), we'd note that at the (imminent) 2nd anniversary of the loan, it is 101% to prepay and in one more year there will be no prepayment penalty.

Alternately, depending on market conditions, the liquidity in the used floorplan facility provides quite a bit of capacity to do accretive tuck-ins without adding senior debt.

Overall we think a covenant breach is unlikely, but in the possible scenario where it occurs, it wouldn't stop the show here / the pound of flesh extracted by Oaktree is likely to be something manageable in context of compelling long-term prospects.

Returns Sensitivity

We think that the value of the RMBL platform as a consolidator, as well as its organic growth initiatives mean it should at least trade at a premium to one-off dealerships, which transact at 4-5x EBITDA. Assuming a barely premium 6x EBITDA multiple on 2024E EBITDA of ~$130mm yields a PT of ~$25/sh. We think there is a real upside case opportunity here where RMBL can grow EBITDA more substantially over time and be valued using a growthier multiple - it is easy to see what would happen with the stock in that scenario (our longer-term PT framework is something like 7-8x on an EBITDA approaching $200mm within a few years). 

Catalyst

• Guidance and commentary that is supportive of 2023 covenant compliance and provides strong liquidity snapshot
• Strong 2023 peak selling season
• Continued market share gains in used retail and success with Orlando-like hybrid sites
• Implementation of centralized inventory / pricing controls
• Execution on accretive tuck-ins
• Takeout (PE and / or strategics like SAH who are showing increased interest in gaining scale in powersports)