Rewinding back to FY17, the RV industry faced the opposite issue as lower production levels created shortages across many dealerships.
To meet demand, dealers ordered aggressively early in FY18, building up their inventory to elevated levels. When demand didn't meet their heightened expectations in 2018, a significant supply and demand imbalance was created.
As a result, THO pulled back on production and dealers were forced into a highly-promotional environment, negatively impacting THO's margins, growth, and profitability.
Prior to this morning's Q3 report, THO missed EPS expectations for five straight quarters, including huge misses of $1.12 last quarter and $1.41 in Q1. Additionally, its revenue declined by high double-digit rates in both of those quarters.
Considering its dismal recent financial results, it's safe to say that investors' expectations for THO's quarterly results this morning were muted. Its one cent miss ($1.65 vs. $1.66) and more modest revenue shortfall ($2.5 bln vs. $2.6 bln), combined with some encouraging commentary regarding the inventory situation, are helping drive the stock higher.
To access THO's earnings press release, click here.
The company has lowered production rates at a number of its facilities, and in some cases, has shifted to four-day work weeks. This reduction in wholesale shipments helped decrease its North American independent dealer inventory levels by 20.3%.
The improved inventory situation also pushed its gross margin higher to 11.7% compared to 11.0% last quarter. Still, THO has a lot of work to do in order to reach the mid-teen levels it was achieving in 2017.
Another significant facet to THO's ongoing turnaround is its $2.0 bln acquisition of Erwin Hymer Group (EHG), a leading maker of RV's in Europe, which was completed at the start of 3Q19.
A key to THO's growth strategy is to expand in geographies outside of North America. With EHG generating $767.5 mln in net sales this quarter (30% of net sales), and representing 22.5% of total European market share, the acquisition is a major step towards diversifying its business.
It should also help stabilize the business while the North American market continues to work through the inventory issues. THO's CEO stated that the North American market is likely to remain challenging for the balance of 2019, although it is showing signs of improvement.
Longer-term, the company remains bullish on its growth prospects due to some favorable trends and market dynamics. Specifically, of the 80 mln campers in 2018, only about 25% used an RV and only about 40% of those people owned the RV they used.
Furthermore, with the RV market totaling 415K units annually, a relatively small number of the millions of campers deciding to purchase an RV would move the needle considerably.
Key Takeaways: THO missed on both the top and bottom lines and its 11% net sales growth was entirely fueled by its EHG acquisition. Yet, the stock is trading higher this morning on signs that the inventory headwinds that have plagued its financial results are beginning to ease.
Additionally, as the initial expenses related to its acquisition are absorbed, EHG should become a meaningful positive factor for margins, cash flow, and earnings in 2H19 and into FY20.