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Reflecting continued headwinds within the RV industry, Winnebago (WGO -3%) missed top and bottom-line estimates in Q3 (May), registering another quarter of double-digit yr/yr declines across both metrics. Investors were partly braced for a weak quarter following rival Thor Industries' (THO) underwhelming AprQ numbers last week. Additionally, elevated interest rates and cost of ownership led to dismal quarterly projections from analysts.

However, even against a lowered bar, WGO still fell short, underscoring just how challenging market conditions remain. As shares pack up and head for 52-week lows today, it is clear that investor optimism surrounding a swift uptick in demand within the RV industry has languished.

• As has been the case for multiple quarters, the unfavorable demand backdrop was illuminated by WGO's 47% plunge in adjusted EPS yr/yr to $1.13 and 12.7% drop in revs to $786 mln in Q3. Towable RVs did enjoy a 0.6% bump in revs yr/yr. However, this was dwarfed by a 20.1% decrease in Motorhome RV sales and a 31.8% decline in Marine sales. Furthermore, WGO recorded another yr/yr decline in backlog across each segment, as dealers remain highly wary of picking up too much inventory.
• On the bright side, profitability enjoyed a sequential lift, with adjusted EBITDA margins ticking 30 bps higher to 7.4%. Meanwhile, gross margins remained stable qtr/qtr at 15.0%. Helping the cause were sequential bumps in Towable RV and Marine adjusted EBITDA margins.
• WGO does not provide formal guidance, but it did leave its previous mid-cycle organic growth targets unchanged, including revs of $4.5-5.0 bln, a solid jump from the $3.5 bln delivered in FY23 (Aug), gross margins of 18.0-18.5%, North American RV market share of over 13%, and U.S. aluminum pontoon market share of 13%.

Despite shares of WGO jumping last quarter on a moderate earnings beat and in-line revenue growth, we were cautious, as overall results still pointed to unwavering issues across the RV landscape. Even if interest rates decline meaningfully, it is unclear if this will be enough to generate a rapid reacceleration of demand. While RVs are often financed, maintenance, storage, and fuel costs are still involved. Although inflation has cooled, its cumulative effects could produce hesitation among potential RV buyers and upgraders for longer than WGO and its peers expect.

That said, given how far the stock has fallen since reaching one-year highs in December, which followed an impressive rally on hopes of several interest rate cuts this year, WGO is beginning to look attractive. Near-term challenges could keep shares from mounting a rapid turnaround. However, the increased interest in the RV lifestyle sparked by the pandemic should not be so quickly discounted. WGO is engaged in the premiumization of its product suite, helping bolster its margins over a longer timeframe and better cushioning it against economic downturns as higher-income consumers are not as often deterred by a rising cost of ownership compared to a lower-income demographic. Its rival THO, whose shares have held up relatively better, is also beginning to possibly carve out a bottom as it continues to endure post-AprQ selling pressure.