Winnebago (WGO 22.43, +2.48, +12.40%) is trading higher after the company reported 1Q19 (Nov) earnings this morning.
WGO is a manufacturer of recreation vehicles (RVs) such as motorhomes, travel trailers, fifth wheel products, and boats. Because the purchase of an RV is almost always both a sizable and a highly discretionary investment, the financial performance of companies in this sector tends to mirror the overall economy closely. Margins in this business are thin, with gross margins generally seen in the low-double digits and operating margins in the mid-to-high single digits. Given these conditions, RV companies can easily fall into the red during down cycles.
Acquisitions in recent years -- most notably that of towable travel trailers and fifth wheel products maker Grand Design -- significantly expanded WGO's exposure to the fast-growing Towables market. The company’s boosted position in the category is showcased in, its revenue breakdown over the past three years. In FY16, Towables contributed just 9% of total revenue while sales in the Motorized category formed 90% of revenue. In FY17, that ratio changed to 44% for Towables and 55% for Motorized and, in FY18, Towables made up a majority of revenue for the first time at 56% of total revs versus 43% for Motorized.
In the company’s first fiscal quarter of 2019, EPS rose 23% year/year to $0.70 while revenue was up 9.7% year/year to $493.7 mln. Both results were better than market expectations. Breaking it down by segment, revenues for the Towable segment rose 12.8% year/year to $292.8 mln, driven by continued strong organic unit growth across the Grand Design RV branded line and pricing. Adjusted EBITDA margin for this segment came in at 10.5%, a 240bp decrease year/year, reflecting continued cost input pressures and a robust comparable period. Backlog levels remain strong but declined 3.9% year/year on a dollar basis.
Motorhome revenue declined 3.6% year/year to $181.3 mln, but segment adjusted EBITDA margin increased 400bp, driven by net pricing and operational improvements. Backlog decreased 23.6%, in dollars, reflecting rental unit and new product order timing, in addition to a more challenging late fall shipment environment.
WGO says that it's “very pleased with the strong start” to Fiscal 2019, which it identifies as a product of upward momentum in its North American RV business and efforts to integrate its new marine division, which follow the company’s acquisition of recreational boat builder Chris-Craft this summer. Sales growth remained robust; WGO continued to take overall retail market share on the RV side, and WGO was able to expand margins, primarily driven by profitability recovery within its Motorhome segment. WGO is also satisfied with the strong reception its new products received at both the RV Open House and the Fort Lauderdale International Boat Show this fall.
Looking ahead, WGO does not provide guidance, as is typical for the company. However, the company will be lapping another strong quarter in FebQ, which could impact top-line growth. Also, it will likely continue to face cost pressures for raw materials and components, such as steel and aluminum. Tariffs have reduced the availability of lower priced steel from China.
In sum, the stock has been trending steadily lower for much of 2018. In December 2017, it hit a high of $58.65 but has been trending lower since and closed yesterday below $20. Concern surrounding the stock includes fears that rising interest rates will dampen demand for RVs, as these are large purchases and many people need financing to purchase them. Also, there are concerns that a falling stock market and resultant smaller 401k balances will dissuade buyers from buying RVs.
While FebQ will be lapping a tough comp last year, underperformance in that quarter would probably not be a big concern, as FebQ is usually WGO's weakest quarter of the year. The peak selling season is mostly found in spring and summer months, with lower sales coming during winter months. Investors will have to wait until MayQ and AugQ to get a better sense of whether the RV market will start to show improvement. Right now, the retail environment remains difficult.
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