Thor Industries Grapples With High Dealer Inventories

Leading recreational vehicle (RV) manufacturer Thor Industries, Inc. (NYSE: THO) reported a drop in revenue, as well as deterioration in several key financial metrics, in its fiscal fourth-quarter 2018 earnings report issued Thursday before the markets opened. The unexpectedly tepid performance jarred Thor shares, which traded down nearly 15% early in the trading session following the earnings release. Let's review headline numbers below and uncover why shareholders found the report distasteful:

Thor Industries: The raw numbers

What happened with Thor Industries this quarter?

  • Towable RV sales, a significant source of total company growth in recent quarters, were flat at $1.41 billion against the fourth quarter of 2017.
  • Motorized RVs, Thor's second major segment, reported a 13.2% top-line decline against the prior-year quarter to $421.3 million.
  • The company's consolidated backlog fell 65% against Q4 2017 to $1.4 billion.
  • The decline in unfilled dealer orders comprised a 45% dip in towables backlog to $767 million and a 28% slump in motorized backlog to $634.1 million.
  • Management attributed the drastic trimming of its unfilled order book to Thor's production capacity investments made over the last year, as well as elevated dealer inventories, and a more typical preseason ordering pattern versus higher levels over the last few years.
  • Gross margin decreased by 260 basis points to 13%. The company cited numerous pressures on gross profits, including high (though recently moderating) labor expense, higher-than-expected warranty costs, and climbing commodity costs resulting from both implemented and threatened aluminum and steel tariffs.
  • Two days before its Sept. 20 earnings release, Thor announced an agreement to merge with privately held Erwin Hymer Group, based in Germany, for 2.1 billion euros (approximately $2.5 billion at current exchange rates). Thor will pay 1.7 billion euros ($2.0 billion) in cash for the European manufacturer, and in addition, Erwin Hymer's owners will receive 2.3 million shares of Thor stock. Thor will also assume 300 million euros (roughly $350 million) of Erwin Hymer's debt. The deal will create the world's largest recreational vehicle company and give Thor a production footprint in Europe.

What management had to say

In the company's earnings press release, CEO Bob Martin pointed to the positive side of working with dealers to reduce excess inventory and the normalization of ordering patterns going forward:

Martin also observed that macroeconomic trends, favorable demographics, dealer enthusiasm, and fresh inventory all boded well for the new fiscal year. But he expressed near-term caution:

Looking forward

Thor Industries doesn't issue quantitative earnings guidance, so CEO Martin's admonition above regarding the first two quarters of fiscal 2019, namely slower top-line growth and ongoing margin pressures, forms the basis of an uncertain outlook in the first half of the year.

Perhaps the biggest unknown shareholders face is the degree to which demand for Thor's vehicles might be waning. A reduction in backlog could result from many factors, as I explained earlier this year in a deeper analysis of Thor's order flow. But a rapidly declining backlog in conjunction with slow-moving dealer inventory could signal a more prolonged bout of sales weakness. Thor might well be the largest global RV enterprise by the end of the fiscal year once it closes its transaction with Erwin Hymer. But shareholders will have trouble visualizing the long-term benefits of the deal while their attention is held by a question mark hovering over demand in the company's core market.

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Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.