Rising Fixed Cost Density Will Undermine Powersports Turnaround Prospects Over Time

Catalysts

About RideNow Group

RideNow Group operates multi-brand powersports retail locations and related services across the United States.

What are the underlying business or industry changes driving this perspective?

• The strategy of consolidating into large destination stores increases fixed cost density and execution risk. As a result, any slowdown in unit demand or regional consumer traffic could quickly leverage negatively into lower revenue and compress adjusted EBITDA.
• Reliance on consumer financing for roughly two thirds of buyers leaves the business exposed to any pause or reversal in interest rate cuts. This would pressure affordability, slow unit volumes and weigh on same store revenue growth.
• The sharp decline in the vehicle transportation segment highlights volatility in ancillary businesses. A weaker contribution from this asset-light operation limits diversification and may cap consolidated margin expansion and earnings growth.
• Recent gross margin improvements in both new and pre-owned units are partly supported by a healthier inventory position. However, as OEM inventories normalize and promotional activity changes, competitive pricing pressure could erode unit GPU and net margins.
• The turnaround relies heavily on disciplined cost control and portfolio optimization. As easier SG&A and underperforming store actions are cycled, incremental gains may slow, limiting future operating leverage and earnings upside relative to the current valuation.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming RideNow Group's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -9.3% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $2.8 million (and earnings per share of $0.08) by about December 2028, up from $-102.4 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 87.7x on those 2028 earnings, up from -2.1x today. This future PE is greater than the current PE for the US Specialty Retail industry at 20.2x.
• Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.5%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The turnaround in the core powersports segment, with the first year-over-year improvement in revenue, unit sales and gross profit since 2023, suggests that operational changes are starting to work and could be associated with sustained revenue growth and higher earnings over time.
• Structural cost discipline, evidenced by lower SG&A dollars and SG&A as a percentage of gross profit, plus the consolidation into higher productivity aircraft carrier stores, could permanently raise operating leverage and support stronger net margins.
• Improving gross profit per major unit across both new and pre-owned vehicles, together with healthier and younger inventory levels, indicates better pricing power and mix, which may be associated with expanding gross margins and earnings.
• Lower interest expense from refinancing and debt repayment, combined with recent Fed rate cuts that benefit both floorplan and term debt, can free up cash and improve free cash flow, supporting net income resilience even in a modest growth environment.
• Management’s focus on pre-owned sourcing tools, fixed operations growth and disciplined pre-owned inventory buildup ahead of peak seasons may deepen customer engagement and diversify profit drivers, contributing to more stable revenue and EBITDA across cycles.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $4.5 for RideNow Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.0, and the most bearish reporting a price target of just $4.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $1.3 billion, earnings will come to $2.8 million, and it would be trading on a PE ratio of 87.7x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of $5.7, the analyst price target of $4.5 is 26.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.