What to Watch When Thor Industries Reports Earnings

Global recreational vehicle (RV) manufacturer Thor Industries (NYSE: THO) is slated to release its fiscal third-quarter 2019 earnings report on June 10. The company's shares have struggled following a normalizing of inventory levels in the RV industry in 2019, though they're still up roughly 3.5% year to date. Can the stock find some momentum post-earnings next week? Below, let's review four key themes investors should watch when Thor hands in its scorecard for the last three months.

1. Revenue: Stabilizing or still falling?

Last quarter, Thor adjusted its production levels due to softer consumer demand after the company enjoyed record sales in the previous fiscal year during an industry peak. In the second quarter of fiscal 2019, Thor's total revenue slumped 35% to $1.29 billion. Towable RV sales dropped by 36% to $882 million, while motorized segment sales fell 34% to $372 million.

In the current fiscal year, Thor has eased production as RV dealers "right-size" inventory on their lots, following the normalization of buying patterns after several quarters of vigorous sales. Investors will look to see whether the third quarter of 2019 reveals a significant year-over-year revenue plunge as in the second quarter, or if consumer buying patterns now point to a stabilizing top line.

2. Profit margins may be set for a rebound

Despite the huge top-line compression last quarter, Thor's gross margin surprisingly only fell by 270 basis points to 11%. While greater-than-usual discounts and promotions carved into gross profit on the back of weaker sales, the company managed to effect a sales shift to higher-priced vehicles in both the towable and motorized segments.

Management also proactively reduced production days at some plants as part of the effort to tweak manufacturing capacity, thus helping to neutralize some of the pressure from the lower revenue level. If revenue stabilized or perhaps expanded slightly over the last three months (on a year-over-year basis), gross margin will likely have improved by a few percentage points, given how well the company managed this metric on a 35% drop in revenue last quarter.

3. State of the backlog

Over the last couple of years, Thor has maintained a healthy order backlog in both its towable and motorized segments. Keeping a surplus of orders is critical as it can help a manufacturer recognize additional revenue even during periods of slow sales. This is because revenue is recognized each time an RV manufacturer ships a completed vehicle to a dealer lot.

During the peak of consumer demand in fiscal 2018, Thor's backlog hit a record level of over $3.5 billion. The backlog has since declined to roughly $1.5 billion as of the second quarter of fiscal 2019. I recently argued that the present backlog total, worth about three months of production, is probably near an equilibrium point that balances capacity and demand. While shareholders have no reason to complain if the backlog total increases sequentially in the third quarter, if it falls too far below the current $1.5 billion mark, investors may perceive unfilled order flow as a bit too thin for comfort.

4. Progress on the EHG integration

On Feb. 1, the first day of the fiscal third quarter, Thor completed its acquisition of European RV manufacturer Erwin Hymer Group, for a total of roughly $2.2 billion. The merger creates the world's largest RV manufacturer and gives Thor a firm foothold in the lucrative European RV market.

The combined company is expected to generate $11 billion in annual sales. Thor's revenue mix will consist of 77% North American sales and 23% European sales going forward. Shareholders will digest a full quarter of combined results on June 10, and they'll seek to grasp initial transaction costs tied to the merger. Thor's presentations to investors both before and after the acquisition indicated a number of identified manufacturing and cost synergies between the two companies, although these haven't been fully quantified yet.

In addition, as is customary after a significant merger, management will probably give investors an overview of the integration of the two businesses under one banner, from executive teams to the combining of software systems. The EHG transaction has the potential to significantly improve Thor's earnings in the years to come, but investors will immediately look for a smooth transition, and a roadmap of cost savings and revenue opportunities in the near term.

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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.