Lawsuit against Malibu Boats could put $110 million worth of boats in limbo, analyst says in downgrade

By Bill Peters

Boat maker says it has cut ties with one of its biggest dealerships, prompting Raymond James to warn of 'heightened uncertainty' amid weaker demand

Shares of Malibu Boats Inc. fell on Monday after getting hit with a downgrade from analysts at Raymond James, who said a lawsuit against the recreational-boat maker from one of its biggest dealerships compounded already-existing difficulties related to weaker demand and a shakeup within its leadership.

In a note on Monday, Raymond James analysts said they were downgrading Malibu Boats (MBUU) to their equivalent of hold, from buy. Shares of Malibu Boats fell 6.8%. The stock is down 36% over the past 12 months.

In a lawsuit last week, the dealership, Tommy's Boats, alleged that Malibu Boats - in an effort to prop up its sales figures, margins and stock price amid flagging demand - effectively forced the dealer to bring the boat maker's higher-priced but tougher-to-sell boats onto its lots. Those actions, Tommy's alleged, made it "impossible" for the dealership to hit sales targets and left it unable to handle financial obligations associated with the sales.

Malibu Boats, in response, said that "any and all boats that Malibu sold to Tommy's were ordered by Tommy's," and that it had fulfilled its obligations under those agreements. And it said it ended its relationship with Tommy's "due to concerns about Tommy's own conduct and its financial soundness." The company said it would defend itself in court.

"Nonetheless," the Raymond James analysts said Monday, "we find it difficult to recommend the stock at this point given both the heightened uncertainty and potential distraction the Tommy's resolution will likely present - during a challenging inventory environment and while the company is in the midst of a CEO search, with Jack Springer set to leave in about a month.

"Thus, we believe a move to the sidelines is warranted until we gain greater clarity on the situation and any improvement in boat demand," they wrote.

Malibu Boats said in February that Springer would depart as chief executive on or before May 17. Of the seven analysts ratings on Malibu Boats tracked by FactSet, four are buys or the equivalent. Three are hold ratings.

Recreational-boat demand surged during the pandemic, as restrictions on indoor activities forced people to look outdoors for fun. But demand later fell from those levels, as inflation and higher interest rates made it harder to buy boats.

Malibu Boats in January warned of falling sales this fiscal year, as higher interest rates cut into purchases. However, it said the upcoming boat-show season would "serve as an additional indicator of retail recovery, as we believe it will reflect the continuing consumer interest for our larger, feature-rich boats."

Tommy's, in its lawsuit, said it had 15 dealerships nationwide, and had been a dealer for Malibu for more than a decade, accounting for a third of Malibu's boat sales.

The dealership alleged that starting in 2022, Malibu, using its own market analysis, pressured Tommy's to expand its floor-plan financing to make room for more products. However, the dealership alleged, Malibu then "refused" to pay incentives promised in exchange, forcing Tommy's into default with its floor-plan lender. Tommy's also alleged that Malibu "ultimately reneged" on a promised repurchase agreement.

Raymond James said that the lawsuit raised questions about where else Malibu could sell some $110 million worth of boats held by Tommy's, and how that might affect the company's sales and margins.

"To be clear, while the potential outcome of this lawsuit is clearly difficult to predict and will likely remain an overhang on the stock, the more significant issue in our view is the impact of Tommy's inventory being absorbed into the dealer channel on MBUU's sales and margins, the implications of which we fear could extend into FY25," the analysts said.

The analysts said it was unclear what condition that inventory was in. It was possible most of those boats had been sitting at Tommy's locations for months, they said.

They also said that it was important that those boats get sold through an authorized Malibu Boats dealer to keep their warranty, but that other dealers might already have what they need. Others, the analysts said, might be looking to cut inventories, amid the current weaker demand, and only take them on at a big discount.

Malibu, in a statement on Thursday, said it was "working with our dealership network and are in discussions with strong dealer partners to limit any service gaps in markets previously served by Tommy's."

-Bill Peters

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04-15-24 1559ET

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