Investors have found several reasons to shed shares of recreational vehicle (RV) manufacturer Winnebago Industries (NYSE: WGO) throughout 2018, including fear of potential weakness in retail demand and the uncertain impact of import tariffs. However, the company invited investors back with a steady first-quarter fiscal 2019 earnings report issued on Wednesday.
The release revealed double-digit earnings growth and benign industry conditions -- for now-- which caused shares to rally by 13.5% in Wednesday's trading session. Note that all comparative numbers in the discussion that follows are presented against the prior-year quarter (the fiscal first quarter of 2018).
Winnebago Industries: The raw numbers
What happened this quarter?
- Winnebago's top line was advanced by its fast-growing towables segment, which has exhibited strength the entire year. The segment booked a revenue increase in the last three months of 12.8% to $292.8 million. Revenue in motorhomes, Winnebago's other major segment, dipped 3.6% to $181.3 million.
- Gross margin improved by 0.4 percentage points to 14.4%. Management attributed the improvement to a favorable sales mix due to the tilt toward higher-margin towable vehicles, as well as improved margins in the motorhome segment.
- Though the margin advance was slight, it was well received by investors, who were worried that consumers might begin to pull back on discretionary spending, resulting in competitive pricing pressure among RV companies. In addition, shareholders anticipated a potentially significant impact from import tariffs. Neither of these conditions came to pass.
- The company's total backlog decreased during the quarter. Normally, a rising backlog indicates order strength, but again, the magnitude of the decrease fell below investors' anticipations. While motorhome backlog declined nearly 24% to $191.6 million, towables backlog dipped just 4% to $327.7 million.
- Management explained that the current backlog represents a "rebalancing" from elevated levels in the prior-year period. It's also decreased as the company has introduced additional production capacity during the year.
- Dealer inventories provided further evidence of a balanced supply and demand equation. Motorhome units rose 5.5%, alleviating worries of an outsized buildup of inventory on dealer lots. Towables dealer inventory units rose 38%. However, this is partially a function of the comparably faster retail sales rate of towables versus motorhomes.
- During the company's earnings conference call, management stated that within the RV industry, concerns about high levels of dealer inventory appear to be decreasing "with each passing month." As for Winnebago's own units, it assured investors that supply on dealer lots has remained within its "comfort zones" both in terms of dollars and units.
What management had to say
Winnebago's management relayed additional information regarding the state of the industry -- and the company's relative strength -- during the earnings call. CEO Michael Happe noted that industry estimates for wholesale RV shipments in 2019 could range from flat to a mid-single-digit decline. Happe pointed out that in the trailing three-, six-, and 12-month periods, Winnebago's consolidated retail (i.e., dealer sales) growth has outperformed the industry by 15 to 20 percentage points.
While acknowledging that the gap will likely narrow if consumers pull back on big-ticket purchases like RVs in 2019 (should the economy decelerate), management expressed confidence that Winnebago could still outpace industry growth.
Below, I've provided some additional remarks by CEO Michael Happe aimed at further clarifying Winnebago's approach to a potential economic slowdown:
Winnebago doesn't provide forward earnings guidance, and this perhaps contributes to the volatility it often seems to experience around earnings results. Looking ahead to fiscal and calendar 2019, potential shareholders should observe that in 2018, Winnebago shares have slumped nearly 50%, and that's inclusive of Wednesday's pop. The stock currently trades at just six times forward earnings, meaning that on a price-to-earnings basis, it trades at a 60% discount to the average forward P/E ratio of 15 found within the S&P 500 index.
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