Winnebago (NYSE: WGO) has been on a roll lately. As the expansion in the recreational vehicle industry approached its ninth consecutive year, shares trounced the market in 2017. Booming sales growth and increased profitability formed the basis for that impressive stock price rally, yet investor concerns have been rising around whether the RV giant can maintain momentum in the new fiscal year.
Winnebago's fiscal second-quarter earnings report brought more clarity to a few of those questions. Revenue growth was strong heading into the peak selling season, but there were profit challenges in its motorized RV division. Meanwhile, management said they were cautious about broader selling conditions over the next six months.
Let's look at a few big takeaways from the results.
1. Demand is holding up
Sales shot up by 26% this quarter, which outpaced the 19% gain investors were expecting. Winnebago benefited from a 57% surge in deliveries within its towables fleet, thanks mainly to the addition of the Grand Design portfolio. Motor home deliveries rose by 5% to mark an acceleration over the prior quarter's 1% uptick.
The growth corresponded to market share gains while suggesting Winnebago's newest product launches are resonating with RV fans. Winnebago won more space on dealership lots, in fact, thanks to its widening product line. That success came even though dealer inventory slipped by 5% compared to a 2% decrease in the prior quarter.
2. Profits are mixed
Gross profit margin notched another increase, rising to 14.4% of sales from 13.3% a year ago. That boost was driven by the shift toward towable products that generate much higher profits than motorized homes do. Adjusted earnings in the division, which today accounts for 57% of sales, surged higher by 94% thanks to healthy demand and modest production expenses.
Winnebago's motorized division wasn't as impressive. Profitability dipped in that segment due to rising production costs and greater manufacturing investments. "There remains much work ahead on motorized profitability," CEO Michael Happe said in a press release, "as we work to drive a return on the current costs and investments associated with the turnaround strategy." Those elevated costs contributed to a slight drop in operating margin, down to 7.5% of sales from 7.7% a year ago.
3. Cautious outlook
Backlog, which represents dealership orders set to ship over the next six months, rose by 43% in the motorized division and by 10% in towables. Both figures fell from the prior quarter, which might explain why management was muted in their comments on Winnebago's short-term sales outlook. "We remain cautiously optimistic about the retail prospects for the RV industry this year," Happe explained. Executives believe inventory levels, meanwhile, are "appropriate in relation to our momentum and the addition of new products entering the market."
Now it's up to the company to execute over the critical spring and summer selling seasons by winning match-ups against rivals on those dealership lots. At the same time, Winnebago is carefully expanding its production capacity in line with rising demand so it can meet sales predictions while notching the 10% operating margin management has targeted for 2020. That goal seems aggressive but achievable given that profitability is currently sitting at 7.7% of sales.
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