In the second half of 2018, diminished retail demand spurred recreational vehicle (RV) dealers to right-size the inventory sitting on their lots, following several quarters of buoyant growth. Storied manufacturer Winnebago Industries (NYSE: WGO) continued to absorb this shift in demand during its fiscal second quarter of 2019 (the three months ended Feb. 23, 2019), as dealer pullback resulted in decreased revenue. Below, we'll discuss essential details and the larger picture from the company's earnings report released on Monday.
Note that all comparative numbers in the discussion that follows are presented against the prior-year quarter (the fiscal second quarter of 2018).
Winnebago Industries: The raw numbers
|Metric||Q2 2019||Q2 2018||Growth YOY|
|Revenue||$432.7 million||$468.4 million||(7.6%)|
|Net income||$21.6 million||$22.1 million||(2.2%)|
|Diluted earnings per share||$0.68||$0.69||(1.4%)|
Data source: Winnebago Industries. YOY = year over year.
What happened this quarter?
- Motor-home segment revenue dipped 17.3% to $164.7 million. A decline in large Class A and Class C sales was partially offset by sales of smaller Class B units. The benefits of recent pricing actions were diluted by higher dealer incentives during the quarter.
Towable segment revenue fell nearly 6% to $250.7 million. Management attributed weaker sales to ongoing dealer inventory adjustments and a difficult comparison against a high level of shipments in the prior-year quarter.
Gross margin improved by 100 basis points, to 15.4%, as product mix, operational efficiencies within the motor-home segment, and cost-cutting initiatives countered higher materials costs and the granting of dealer incentives.
Operating margin slipped 80 basis points to 6.7%, paced by one-time investments in the business as well as higher costs, including amortization, associated with the company's acquisition of recreational boat builder Chris Craft in June 2018.
Total order backlog declined by 21.4% to $454.9 million, due primarily to dealer inventory rationalization.
- The company is entering the retail high season with several new models, notably the Class B Boldt -- a modified Mercedes Sprinter camper -- and the All-Electric Specialty Vehicle, aimed at the commercial market.
Image source: Getty Images.
What management had to say
In the manufacturer's earnings conference call, Winnebago's CEO Michael Happe addressed the most important determinant of dealer order flow: customer demand. Winnebago believes that despite the recent slowdown, the underlying conditions for higher retail ordering remain robust:
We believe that we are poised to capture incremental growth as we enter the 2019 retail season. Despite the inventory-related headwinds challenging the industry, there are several tailwinds serving as positive indicators regarding future sales and growth opportunities. Consumer confidence has remained relatively stable, and we are continuing to see our customers choose to invest their valuable discretionary resources on creating lasting outdoor experiences with family and friends. Reasonable fuel and oil prices continue to be a strong positive for our businesses.
Lastly, customers' access to capital and financing remains strong as financing companies have, for the most part, avoided abnormally constraining credit availability. The recent data from retail shows and certain sales data over the last several weeks has also been positive. We're seeing retail showed traffic and sales come in ahead of expectations as both were expected to be down during the first part of the year. This further demonstrates our resiliency and our ability to gain share and outperform our peers in a moderated market.
Winnebago doesn't provide quantitative earnings guidance. However, during the organization's earnings call, management pointed out that despite tougher near-term conditions for RV manufacturers, Winnebago's relatively modest revenue losses have outpaced the rest of the industry.
CEO Happe observed that Winnebago continues to gain market share as the industry waits for retail demand to improve: The company is on track to achieve its goal of surpassing 10% of total North American RV market share by 2020. With a host of new models in 2019 and a pared-down backlog, Winnebago appears to be well positioned for any resurgence in RV purchasing in the second half of its fiscal year.
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