Boat and marine products retailer OneWater Marine (NASDAQ:ONEW) reported results in line with analysts' expectations in Q1 FY2024, with revenue flat year on year at $364 million. It made a GAAP loss of $0.49 per share, down from its profit of $0.61 per share in the same quarter last year.
OneWater (ONEW) Q1 FY2024 Highlights:
- Market Capitalization: $367 million
- Revenue: $364 million vs analyst estimates of $364.5 million (small miss)
- EPS: -$0.49 vs analyst estimates of -$0.32 (-$0.17 miss)
- 2024 guidance: exceeded expectations for same-store sales, slightly missed for EPS
- Gross Margin (GAAP): 25.1%, down from 30% in the same quarter last year
- Same-Store Sales were up 2% year on year (beat vs. expectations of up 0.8% year on year)
- Store Locations: 98 at quarter end, decreasing by 2 over the last 12 months
A public company since early 2020, OneWater Marine (NASDAQ:ONEW) sells boats, yachts, and other marine products.
The company’s product offering includes boats and yachts from well-known manufacturers such as Sea Ray and Boston Whaler as well as performance and sport vessels from brands like Yamaha and MasterCraft. In addition, OneWater Marine sells watersports equipment, marine electronics for navigation and communication, and safety gear. Lastly, the company’s locations provide financing and servicing to make them a one-stop shop for recreational boating.
The core customer is an affluent individual or and family who has means, interest in marine activities, and proximity or access to water to use the company’s products. These customers are looking for high-quality products that offer some combination of luxury and performance. They also often demand personalized support and assistance through the life of their boats or yachts.
OneWater Marine locations vary; there are small boutique-style locations to larger flagship stores. As expected, these locations usually sit near waterfront locations such as marinas and harbors. Boats are showcased both inside the showroom as well as outside. Also while inside, customers can find equipment and marine products for sale as well as well-versed associates who can talk through products, financing, and servicing.
Boat & Marine Retailer
Retailers that sell boats and marine products sell products, sure, but they also sell an image and lifestyle to an often wealthier customer. Unlike a car–which many use daily to get to/from work and to run personal and family errands–a boat or yacht is certainly a discretionary, luxury, nice-to-have purchase. While there is online competition, especially for research and discovery, the boat and yacht market is still very brick-and-mortar based given the magnitude of the purchase and the logistical costs associated with moving these products over long distances.Competitors offering recreational marine products include MarineMax (NYSE:HZO), Yamaha Motor Co. (TSE:7272), and Brunswick Corp (NYSE:BC).
OneWater is a small retailer, which sometimes brings disadvantages compared to larger competitors that benefit from economies of scale. On the other hand, one advantage is that its growth rates can be higher because it's growing off a small base.
As you can see below, the company's annualized revenue growth rate of 24% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was incredible as it added more brick-and-mortar locations and increased sales at existing, established stores.
This quarter, OneWater missed Wall Street's estimates and reported a rather uninspiring 0.7% year-on-year revenue decline, generating $364 million in revenue. Looking ahead, Wall Street expects sales to grow 2.6% over the next 12 months, an acceleration from this quarter.
Number of Stores
A retailer's store count is a crucial factor influencing how much it can sell, and store growth is a critical driver of how quickly its sales can grow.
When a retailer like OneWater is opening new stores, it usually means it's investing for growth because demand is greater than supply. OneWater's store count shrank by 2 locations, or 2%, over the last 12 months to 98 total retail locations in the most recently reported quarter.
Taking a step back, the company has rapidly opened new stores over the last eight quarters, averaging 19.3% annual growth in its physical footprint. This store growth is much higher than other retailers and gives OneWater a chance to scale towards a mid-sized company over time. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.
OneWater has been one of the most successful retailers over the last two years thanks to skyrocketing demand within its existing stores. On average, the company has posted exceptional year-on-year same-store sales growth of 20,694,388,817%. This performance suggests that its rapid buildout of new stores is justified because when a company has strong demand, more locations should help it reach more customers seeking its products and boost revenue growth.
In the latest quarter, OneWater's same-store sales rose 2% year on year. By the company's standards, this growth was a meaningful deceleration from the 30,232,017,000% year-on-year increase it posted 12 months ago. We'll be watching OneWater closely to see if it can reaccelerate growth.
Gross Margin & Pricing Power
We prefer higher gross margins because they make it easier to generate more operating profits.
OneWater has poor unit economics for a retailer, leaving it with little room for error if things go awry. As you can see below, it's averaged a 29.1% gross margin over the last two years. This means the company makes $0.29 for every $1 in revenue before accounting for its operating expenses.
OneWater produced a 25.1% gross profit margin in Q1, marking a 4.9 percentage point decrease from 30% in the same quarter last year. Although the company could've performed better, we care more about its long-term trends rather than just one quarter. Additionally, a retailer's gross margin can often change due to factors outside its control, such as product discounting and dynamic input costs (think distribution and freight expenses to move goods). We'll keep a close eye on this.
Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
This quarter, OneWater generated an operating profit margin of 1.8%, down 5.5 percentage points year on year. We can infer OneWater was less efficient with its expenses or had lower leverage on its fixed costs because its operating margin decreased more than its gross margin.Zooming out, OneWater was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer retail business, producing an average operating margin of 5.1%. On top of that, OneWater's margin has declined, on average, by 12.1 percentage points year on year. This shows the company is heading in the wrong direction, and investors were likely hoping for better results.
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q1, OneWater reported EPS at negative $0.49, down from $0.61 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.
Between FY2021 and FY2024, OneWater's adjusted diluted EPS dropped 84%, translating into 45.7% annualized declines. In a mature sector such as consumer retail, we tend to steer our readers away from companies with falling EPS. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).
On the bright side, Wall Street expects the company's earnings to grow over the next 12 months, with analysts projecting an average 186% year-on-year increase in EPS.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.
Enter ROIC, a metric showing how much operating profit a company generates relative to its invested capital (debt and equity). ROIC not only gauges the ability to grow profits but also a management team's ability to allocate limited resources.
OneWater's five-year average ROIC was 14%, somewhat low compared to the best retail companies that consistently pump out 25%+. Its returns suggest it historically did a subpar job investing in profitable growth initiatives.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, OneWater's ROIC has averaged a 12.3 percentage point decrease each year. In conjunction with its already low returns, these declines are a red flag and suggest the company's profitable investment opportunities are fewer than in the past.
Key Takeaways from OneWater's Q1 Results
Same-stores sales beat in the quarter and guidance for full year same-store sales exceeded expectations. Full year EPS guidance was maintained, which is comforting. On the other hand, gross margin and EPS both missed analysts' expectations this quarter. Overall, the results were not perfect but pretty solid. The stock is up 7.4% after reporting and currently trades at $27 per share.
Is Now The Time?
OneWater may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We have other favorites, but we understand the arguments that OneWater isn't a bad business. First off, its revenue growth has been exceptional over the last four years. And while its declining EPS over the last three years makes it hard to trust, its marvelous same-store sales growth is on another level.
OneWater's price-to-earnings ratio based on the next 12 months is 6.9x. We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like OneWater, it seems to be trading at a reasonable price.
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