Malibu Earnings: Skies Clouded by Consumer Weakness, but We Think It Can Weather the Storm

Echoing commentary of other recreational product companies recently, narrow-moat Malibu MBUU has experienced a rapid drop-off of retail demand, as more consumers are hindered by higher interest rates and economic uncertainty. As a result, the firm saw unit shipments decline 24% in its first quarter, below the 22% decline we’d forecast, although average selling prices, or ASP, still rose 11.5%, helped by higher-ticket saltwater comprising a larger part of the mix. Higher floorplan financing and input costs sent the gross margin down 250 basis points, to 22.2%, and operating expense ratios rose due to higher compensation costs, leading to 370 basis points of adjusted EBITDA compression (15.2%). In response to eroding conditions, Malibu lowered its 2024 sales outlook to include a high teen to low 20% decline (from mid to high teen decline prior) and nudged EBITDA contraction lower, to 350-450 basis points (from 300-400 basis points), a bit below our outlook before the earnings call, which included a fiscal 2024 sales drop of 15% and EBITDA contraction of 320 basis points. As such, we plan to lower our $87 fair value estimate by a mid-single-digit rate, but view shares as undervalued.

We contend Malibu is well positioned to protect its profitability independent of the economic environment. Even with massive compression, the firm is set to deliver a roughly 16% adjusted EBITDA margin thanks to a flexible cost structure, in which roughly 80% of Malibu’s expenses are variable. Furthermore, we think the healthy balance sheet, with no long-term debt, uniquely positions Malibu to capitalize on any strategic opportunities that may arise during this period of weakness. Outside of broad weakness across the boat industry, we see no fundamental issues with Malibu’s business and expect that, as demand and supply finds its equilibrium, more normalized profitability should ensue. In turn, we don’t plan to alter our long- term outlook, which assumes a high-teen adjusted EBITDA margin.