Lazydays: Sound management or shaky foundation?
In the May issue of RV Trade Digest, my editorial discussed how I considered Lazydays RV SuperCenter to be a well-rounded dealership. I made the statement after reviewing the dealership’s year-end financial report and discovering they had developed a good variety of revenue streams which I felt would help the dealership maintain its viability regardless of the economy.
I still consider Lazydays to be one of the best run dealerships in America, but several readers have taken me to task over my conclusions regarding the dealership’s profitability.
One reader, a motorcycle dealer in Nebraska said he was “blown away” by Lazydays’ profit numbers. He believes any dealership that boasts of bringing in $757 million in sales in 2006, but only drops $1.8 million to the bottom line is “unsustainable.” By his math, Lazydays retained just 0.24 percent of their annual income.
He said, “In the motorcycle dealership world, we have learned that anything below a 3 percent net profit will most likely have a negative cash flow. A little inventory growth and a little shrinkage plus some income taxes will typically eat up at least 3 percent. I don’t think our business is that different from RV dealers, apart from the larger sales amounts.
“Even if they could get by on 1.5 percent instead of 3 percent, these guys are in trouble! They earned 0.24 percent. This means for every $100 a customer spends, they are only able to keep 25 cents! I don’t care how good you are, that is cutting things way too close,” he added. “If anything happens – prime rate increase, a minor shift in the value of used units, a sales tax audit, discovery of employee theft, anything at all – that 25 cents is gone.”
The motorcycle dealer noted that his company sold $11.5 million of product last year, and retained $700,000. Another motorcycle dealer in his area sold $30 million in product and retained nearly $3 million in net profit.
“We have the same departments, job functions and titles, the seasonality and the fact that we are selling expensive toys that people don’t really need to people who tend to be passionate about their hobby,” he said. “If Lazydays’ profits are exceptional, I am glad I chose motorcycles.”
On Monday, Lazydays announced its first quarter financial statement. In it, they reported sales of $246 million and kept $1.1 million for a net profit percentage of 0.0045 percent, or 25 cents profit for every $100 in sales. In hindsight, that does appear low.
However, I suspect that Lazydays hires a horde of accountants and tax lawyers that help them determine ways to maximize their deductions in order to reduce their tax liability. Isn’t that what any good business owner would do?
In looking at their most recent financial statement, a few things jump out. First, their receivables went from $3.7 million in 2006 to a credit balance of $9.7 million. Second, their inventory level went from $15.8 million to $8.4 million. Third, payables shot up from $4.42 million to $9.53 million. Finally, the dealership’s floorplan payments dropped from $27 million to $13.5 million.
Yet, when all the dust settled, The company still made a profit of nearly $3 million and had $4.3 million in cash on hand at the end of the quarter. To me, this still sounds like a well-managed dealership firmly in control of where it wants to go.
Am I missing something?
June 3rd, 2007 at 10:58 pm
If you study the balance sheet of the company you would know they are really strugling from a cash flow perspective. It seems as though the margin compression they are experiencing is going to put a real drain on them. Has the competition finally worn them down? My prediction is that it will always be a great place but downsizing is what they will have to do to increase or maintain profitablity. Dealers are coming for their customers and will do what it takes to get them. It is a solid operation but has vulnerability as they lose key management.
May 30th, 2007 at 8:58 pm
I respect Dell’s viewpoint, and always love to hear additonal input to Greg’s blogs. As many in industry know, my RV work is my “hobby” and a passion that I thouroughly enjoy. When I broke into this industry I wrote for RV News for almost seven years and refused to take any money until I had earned the trust and respect of the industry. This last thing I worry about is an RV related paycheck, because it is something truly enjoy. My real world job in the document imaging industry serves me well and lets me decide, what I write, who I write for, and how active I want to be. If Lazydays ends my contract tomorrow, I won’t have any problem earning money in the RV industry. My comments about Lazydays are from personal experience with their dealership and hundreds of others that I have come to know through my involvement in this industry. I think the industry can learn a lot from Lazydays, and other large successful dealerships that truly have established destination locations and earned the respect and business of so many RVers.
May 30th, 2007 at 7:43 pm
I am the motorcycle dealership owner who originally raised the question of LazyDays’ profitability. I have no axe to grind as we aren’t in the same industry, but I do understand financial statements. Every industry has a company that wants to make a name for itself by being the biggest and the tempatation is to get there through low pricing. Generally, if they apply pencil to paper they will discover they could make more money on fewer sales by holding their margins. I think my observations that began this discussion have been missed by some.
Firstly, EBITDA is a useful tool, but is easily abused. Here is a nice summary of what it means:
“EBITDA can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next.
“EBITDA first came into common use with leveraged buyouts in the 1980s, when it was used to indicate the ability of a company to service debt. As time passed, it became popular in industries with expensive assets that had to be written down over long periods of time. EBITDA is now commonly quoted by many companies, especially in the tech sector - even when it isn’t warranted.
“A common misconception is that EBITDA represents cash earnings. EBITDA is a good metric to evaluate profitability, but not cash flow. EBITDA also leaves out the cash required to fund working capital and the replacement of old equipment, which can be significant. Consequently, EBITDA is often used as an accounting gimmick to dress up a company’s earnings. When using this metric, it’s key that investors also focus on other performance measures to make sure the company is not trying to hide something with EBITDA.”
EBITDA, multiples of earnings and net worth are of little use unless the dealership is for sale. I wasn’t commenting on any of these issues, nor was I commenting on how happy their customers are or how busy they are. My only observation was on their very low net profits and the resulting implications for cash flow. If your business doesn’t make money, nothing else matters. A business exists for the enrichment of its owners and anyone who claims otherwise is wrong. No sane owner is going to risk lots of money and expend enormous effort if he doesn’t anticipate a profit.
I am reminded of the farmer who sold his corn for $3 per bushell, but had a cost of production of $3.50. He decided the answer was to get a bigger truck and make it up in volume! Busyness (not business), 100X volume, happy people, upbeat atmsophere, new fangled accounting terms - none of this matters if you are broke. Is LazyDays broke? Probably not. I am sure the owners have deep pockets and plenty of resources to draw from. I am also sure they are bright people and behind closed doors there are discussions relating to their low profitability and what needs to be done about it. Any owner of a low profit business will ultimately grow weary of the poor returns and either sell it or change it.
Profits may be old fashioned, but that is what I take to the grocery store! They only accept money as payment for their merchandise. EBITDA, ROI, current ratios, etc., are tools. Profits pay the bills.
My other point was that with margins this low, any little hiccup can be catastrophic. What do they do if the bottom falls out of used RV values? Or if their floorplan rate is bumped one point because the Fed raises rates? There goes 100% or more of the profit for the year.
My old business Prof had two rules for Finance: Some money is good and more money is better. I think LazyDays needs more money.
May 30th, 2007 at 8:48 am
Hello Fellow Commentors….
An old business Prof of mine loved to make the comment “Nothing is as good as Success!” The point is that, depending upon which view you wish to take, LazyDays is a successful store. As an avid RVer and former Florida resident, I can speak from a first hand view. I have visited LazyDays several times and just love the pep and upbeat atmosphere that eminates from this store.
The question of how to value their store is mute when one looks at the number of folks who constantly fill their parking lot and campground with rolling stock of every type and size. I truly believe that the magnet that draws RVers to LazyDays is their focus on Service. I have personally watched their Service Managers interact with folks. It does not matter what the RVer’s need is or what he/she is driving or pulling. Everyone is treated with a courteous manner.
In my view, LazyDays is far from being the “Wal-Mart” of the RV industry. In fact, many Wal-Mart stores could learn some valuable lessons from LazyDays.
PS: Want to check out the meaning of EBITDA? Check out the following:
http://www.valuebasedmanagement.net/methods_ebitda.html
Blessings,
Gene
May 24th, 2007 at 11:14 am
Greg,
Bob might be a freelance writer, but, one who has a paycheck to protect. Although I agree with most of what he has to say, I don’t agree with the comments about pricing and the gutter. Most price battles I fight start with this large dealer. I do not know of another dealer in Florida who has an ad fund to pull from to make their deals work.(Funded by manufacturers). Most dealers I know sell value and service, without it there is only price and yes there are customers who will pay more to do business with other dealers also.
May 22nd, 2007 at 5:55 pm
Good thing they make calculators that have room for such nice numbers. I’ve bought and sold businesses and the only intelligent way to value them is a factor of EBITDA.
With all due respect to Chuck, perhaps those people selling were overly impressed with those people buying, or just let somebody else dictate the terms of the transaction.
Let’s also not forget that one year does not make a company, and is usually not a strong barometer of the company’s value. Look at the history of Lazydays and study their success before poking holes at them, and the way that they sell.
In the interest of fair disclosure, I am now writing for their new magazine, but as a freelance writer and not as an employee.
I know many people that have purchased RVs from Lazydays and they have paid more than other dealers have offered. I know this industry loves to say that RVers always buy on price, and it’s simply not true. They do if the sales rep and the dealership don’t know how to sell value, or have no value that they can add to the sale other than pricing in the gutter.
As a ten-year plus writer in this industry, I am always amazed at the number of dealers that love to complain about Lazydays, or Beaudry’s, LaMesa, or Guaranty that have created a professional customer environment and earn the business on other criteria than just pricing.
I am even more amazed at the number of dealers that complain about Lazydays, and the others, yet they have never stepped foot on the lot to see what makes the professional environment presented by such dealers so unique, and see first hand why people buy from these companies.
I know if I was in an industry where one dealer, on one lot, did 100X the business of the average dealer in that industry, then I would certainly want to visit with them and find out how they do it. So why haven’t more dealers done just that?
Don Wallace was the first to show the industry how to bring a dealership up to the expectations of today’s informed consumer … others have followed … and others are still watching from the sidelines and wondering what happened.
May 22nd, 2007 at 5:55 pm
OK- I’m way far from a good businessman, my degree isn’t an MBA, so I need a bit of help here..
What I see from this:
“First, their receivables went from $3.7 million in 2006 to a credit balance of $9.7 million. Second, their inventory level went from $15.8 million to $8.4 million. Third, payables shot up from $4.42 million to $9.53 million. Finally, the dealership’s floorplan payments dropped from $27 million to $13.5 million.”
Receivables going to a credit of 9.7 million- am I missing something, or is that not an obligation of 9.7 million dollars? Maybe I am reading this wrong though- and receivables went from $4.42 million to $9.53 million.
Payables went up a bit over 5 million, so it looks to me like on these two items they are nearly 15 million in the hole- compared to a “profit” of 3 million with 4.3 million in the bank- but it winds up being a negative, bottom line- if I am reading the receivables wrong, then it zeros out- not bad but not great- the WalMart way- making money on volume.
May 22nd, 2007 at 3:58 pm
In response to Steve’s pop quiz, I believe the correct answer is $50,599,270 for the first quarter.
For 2006, five times EBITDA would be $121,188,565.
Do I win?
May 22nd, 2007 at 3:47 pm
I have to agree that Stewart’s position is correct. A multiple of EBITDA is THE way to price a business.
What does Lazy Days EBITDA X 5 = _ _ _ _ _ _ _
Steve Burgess
ACC Warranty Services
http://www.ACCWS.com
May 22nd, 2007 at 2:49 pm
Greg,
How can you call a dealership that has a bottom line that is 2/10th’s of one percent “well rounded”?
Our store is under $15mm in annual sales, and our bottom line is almost half of theirs. And the reason that their average sale is over $100K? Any dealer in the country can answer that. These guys give away their motor homes.
I have seen purchase agreements from them with $3,000. gross margins on motorhomes that sell for over $200K. There is a reason that Lazy Days sells more motorhomes than ALL New England dealers combined, and it’s not Don Wallace’s smile.
May 22nd, 2007 at 2:08 pm
That’s true, I am certain, in the world of corporate mergers and acquisitions.
In point of fact, over the past 10 years many more dealerships changed hands in the RV industry using a combination of adjusted net worth combined with a a factor of adjusted net earning (profit) than any other formula.
Kindest reards to you Stewart.
Chuck Marzahn
Somewhere in a dealership…
May 22nd, 2007 at 12:50 pm
Greg,
Net income was one measure of profiablilty used when I graduated business school back in 1973. It’s now 34 years later and I am surprised to see that someone who is astute enough to own or work at a motorcycle dealership (your article does not indicate which)would use such a measure to indicate financial condition. I am willing to bet that the selling price that dealership could be purchased for would be set as a multiple of this new fangled financial term the rest of Wall Street refers to as EBITDA rather than net earnings.
Stewart Schaffer
Chief Marketing Officer
Lazydays