Winnebago (WGO 33.93, +2.18, +6.87%) is trading higher, though off of its spike
at the open to as much as +17.6%, after reporting 4Q18 (Aug) earnings this
WGO is a manufacturer of recreation vehicles (RVs) for use primarily in leisure travel and outdoor recreation activities. Specifically, the company sells motorhomes, travel trailers, fifth wheel products, and, newly, 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 pretty closely. This is a very thin margin business with gross margins in the low-double digits and operating margins in the mid-to-high single digits. As such, these companies can easily fall into the red during down cycles.
In late 2016, WGO made a significant purchase when it acquired Grand Design, which makes towable travel trailers and fifth wheel products, for $500 mln in cash and stock. The acquisition significantly expanded WGO's exposure to the fast-growing Towables market and created a broader and more balanced portfolio for the company. The Motorized products division, which sells conventional motorhomes and related products that utilize a motorized chassis, continued to comprise the majority of revenue for a time, but this deal helped to move toward parity between the company’s two reporting segments, contributing to the increase in the Towable segment’s share as a percentage of revenue from 9.2% in the year ended August 27, 2016 to 44.3% at the end of the following year in August 2017. In recent quarters, the Towables category has contributed a larger percentage of revenue to the company’s total net revenue than has the Motorized segment.
Another acquisition of note followed in June 2018 when Winnebago acquired Chris-Craft, a recreational boat builder, from Stellican, providing Winnebago with a fresh entry point into the marine market. Terms of the transaction were not disclosed, but the company did indicate expectations that the acquisition would be immediately accretive to Winnebago’s EPS for FY19.
Turning to the AugQ results, EPS rose 19% year/year to $0.94 while revenue climbed 17.9% year/year to $536.2 mln. Both results were better than market expectations, with revenue achieving a particularly considerable beat. Full year revenue in Fiscal 2018 exceeded $2 bln. This was the first time in its six-decade history that WGO has ever reached this milestone. FY18 revenue rose 30.4% to $2.02 bln.
Breaking it down by segment, revenue for the Motorized segment -- termed the Motorhome segment in this report -- was $228.5 mln, up 2.5% year/year. Adjusted EBITDA margin decreased 150 basis points, driven by investments in the business and increasing cost pressures that recent pricing actions have not yet overcome.
Revenue for its Towable segment was $288.7 mln, up 26.2% year/year, driven by continued strong organic growth across the Grand Design RV and Winnebago-branded businesses. Adjusted EBITDA margin of 14.5% decreased 30 bp.
Finally, during the quarter, Winnebago realigned its operating segments following the Chris-Craft transaction and created a new "Corporate / All Other" category, which includes its Marine and Specialty Vehicles businesses.
Winnebago management says that FY18 was “a tremendous step forward”
strategically, financially, and culturally for the company in which it made
strides toward its transformation into a premier, outdoor lifestyle company,
especially through its Chris-Craft acquisition-enabled entry into the “attractive”
marine category and introduction to a boating customer base, of which many members overlap with Winnebago's traditional RV-using base. Furthermore, both
its Winnebago and Grand Design-branded towables business have “material
momentum,” says CEO Michael Happe with new products of “superlative” quality
driving an increase in business with dealers and end customers alike.
Looking ahead to FY19, WGO, as is typical for the company, does not provide guidance. However, management does say that the expectation going forward is for the company to exceed the growth projections of the industries it competes in. WGO remains comfortable with its own dealer inventories and views its backlogs as reflective of strong future demand. WGO has made progress to increase capacity where needed to deliver product to dealers in a timelier manner. Furthermore, its RV businesses recently introduced new models to “favorable reviews” at its Open House event in September, and indications from the early fall RV retail shows confirm the momentum of its dual-brand, full-line RV portfolio.
From a broader perspective, WGO says that the RV industry, while transitioning to a more moderate pace of shipments in the short-term, continues to be positioned for strong secular growth in the years ahead, as does the marine industry. However, WGO does face strong comps within the RV industry in the first six months of FY19, as well as cost pressures on key materials and components.
The stock has trended steadily lower for much of 2018, falling from its December 2017 high of $58.65 to close yesterday at around $32. The concern of investors and analysts may be that rising interest rates will dampen demand for RVs, as these are large purchases and many people require financing to be able to purchase them. However, that recent prevailing cautious sentiment has taken a backseat today, as investors’ pleased reaction to the company’s AugQ growth and its FY19 outlook pushed the stock, at least momentarily, to levels not neared since mid-September.