The boating industry is navigating choppy waters. After a pandemic-fueled boom, the return to normalcy has been anything but smooth. Dealerships are grappling with bloated inventories, rising floor plan interest costs, and shrinking margins. In this turbulent environment, OneWater Marine (ONEW) emerges as a potential beacon of resilience. Their Q1 and Q2 2024 earnings calls reveal not just a company weathering the storm, but one potentially positioned for a strategic advantage – all thanks to a little-known industry tool: the "curtailment holiday."

During the Q1 2024 earnings call, CEO Austin Singleton acknowledged the challenges: "...inflated floor plan interest costs...margins are continuing to drift down a little bit, but also cash flow is tight because of curtailments." Curtailments, a practice where floor plan lenders require dealers to pay down a portion of their debt based on current market value, are adding significant pressure on dealers already squeezed by thin margins and high interest rates. Singleton painted a stark picture: "It's probably a pretty scary point for a large majority of the industry. They're looking at something that they're not used to having to deal with..."

What makes curtailments particularly worrisome is their impact on cash flow during the critical winter months. As Singleton explained, dealers traditionally build inventory in winter, anticipating a surge in sales during the spring and summer. However, curtailments force an outflow of cash precisely when cash reserves are needed to finance that inventory build. This can create a vicious cycle where dealers are forced to sell older inventory at discounted prices to meet curtailment demands, further eroding margins and jeopardizing their ability to stock desirable new models.

Here's where OneWater's strategic foresight comes into play. Recognizing the looming curtailment challenge, the company actively managed its inventory throughout 2023, ending the year with 24 weeks of inventory on hand, significantly outperforming the industry average of 38 weeks. This disciplined approach, coupled with their size and ability to shift inventory between locations, gives OneWater a crucial advantage. They are not as heavily reliant on new inventory from OEMs as their smaller, independent competitors.

This leads to the intriguing hypothesis that a "curtailment holiday," a temporary suspension of curtailment requirements by floor plan lenders, could become OneWater's secret weapon in 2024. While not explicitly mentioned in the earnings calls, the concept was floated by an industry contact during the Q1 call, and Singleton's response was telling: "A curtailment holiday is probably something that could be needed if it softens up because that sucks cash out of a dealer's cash flow for operations."

OneWater's Advantage: A Potential "Curtailment Holiday"

Imagine the scenario: Smaller dealerships, strapped for cash and facing heavy curtailments, are forced into deeper discounting and fire sales of older inventory. Meanwhile, OneWater, with its healthier inventory position and financial flexibility, weathers the storm without significant margin erosion. This could allow them to capitalize on two fronts: acquiring distressed dealerships at attractive valuations, as Singleton hinted at, and capturing market share as their competitors struggle.

Financial Performance: Weathering the Storm

Let's look at the numbers. In Q2 2024, despite a 7% decline in revenue, OneWater maintained gross margins at 24.6%, down only slightly from the previous quarter. They also proactively implemented cost-cutting measures, signaling their commitment to preserving profitability. These actions suggest that OneWater is taking the necessary steps to withstand a potentially difficult environment, while positioning themselves for a curtailment-driven shakeout in the industry.

Further supporting this hypothesis is the OEM response. Recognizing the pain felt by dealers, manufacturers are cutting production for 2024. This, combined with a curtailment holiday, could create a perfect storm for smaller, weaker dealerships, while offering OneWater a unique opportunity to emerge stronger.

Inventory Levels: OneWater vs. Industry

OneWater Marine has consistently maintained a lower weeks-on-hand inventory compared to the industry average, highlighting their proactive inventory management.

While a curtailment holiday remains hypothetical, the evidence suggests that OneWater Marine is well-prepared for any eventuality. Their proactive inventory management, strategic cost-cutting, and potential for opportunistic acquisitions in a weakened market paint a compelling picture of a company poised for growth, even in the face of industry headwinds. Only time will tell if a curtailment holiday will indeed become their secret weapon, but OneWater is undoubtedly one to watch in the coming months.

"Fun Fact: Did you know that OneWater Marine isn't just about selling boats? They also operate a growing network of marinas, offering services like boat storage, maintenance, and even rentals. This diversification into higher-margin businesses adds another layer of resilience to their business model, making them even better equipped to navigate industry turbulence."