Shares of recreational vehicle (RV) manufacturer Winnebago Industries (NYSE:WGO) enjoyed a single-session gain of nearly 15% following the company's release of fiscal third-quarter 2018 earnings before the markets opened on Wednesday. Winnebago's top-line expansion caught investors by surprise, while healthy earnings per share (EPS) growth added to the enthusiasm:
Winnebago Industries: The raw numbers
|Metric||Q3 2018||Q3 2017||Year-Over-Year Growth|
|Revenue||$562.3 million||$476.4 million||18%|
|Net income||$32.5 million||$19.4 million||67.5%|
|Diluted earnings per share||$1.02||$0.61||67.2%|
What happened this quarter?
The company's revenue improvement of 18% was powered by a jump in its towable segment. Sales in this division improved 33.4% over the prior-year quarter, to $313.4 million. "Towables" represent a more inexpensive class in recreational vehicles. Ranging in price from $15,000 to $30,000, these vehicles can be hitched to the back of an automobile and, as their name implies, towed to a recreational destination. Towable RVs are popular with a younger demographic, and the segment's performance this quarter reinforces the notion that current industry growth rests on a sustainable foundation.
- Management's confidence in its towable segment is reflected in new capacity enlargement efforts. These include an expansion of Winnebago-branded towable production, and the launching of a new production line in the company's Grand Design RV brand.
Revenue in motorized vehicles, the company's second major segment, grew at a much more tepid rate of 3.1%, to $249.2 million. Winnebago is seeking to rekindle the growth rate of this division through the introduction of innovative vehicles, including the new "Outlook," a budget-friendly motorhome featuring family-oriented amenities.
- Gross margin expanded slightly during the quarter, to 15.2%, against 14.9% in the prior-year quarter. The company reported that material inputs are rising slightly, and that it's working with suppliers on cost reduction, while passing on minimal price increases to customers.
Winnebago's total backlog increased by 36% against the comparable prior year quarter, to $193.1 million. Competitor Thor Industries' (NYSE:THO) quarterly earnings, reported earlier this month, revealed a backlog reduction of 18%. Although Thor's management presented a credible argument that the organization's backlog reduction is due to increased production capability, its shareholders nonetheless have worried over demand trends. Winnebago's own backlog growth provides a more positive data point for those taking stock of the larger RV industry.
- Dealer inventories expanded just 1.7% over the prior year, to 4.7 million units. The small change is another sign that consumer demand remains high, and that Winnebago's vehicles aren't accumulating dust on dealer lots.
What management had to say
Shareholders of RV companies are curious about the potential effect of tariffs on steel and aluminum enacted by the Trump administration earlier this year, as these are key components in the manufacture of recreational vehicles. While both Winnebago and Thor have acknowledged modest commodity component increases in 2018, Winnebago CEO Michael Happe gave shareholders a more nuanced view of possible impacts during the company's earnings conference call:
One of our very real concerns with the tariffs and really, the overall trade war climate that is building is that ultimately, the North American customer in this case will end up paying for those tariffs and that trade war. And that will make those end customers have to -- it'll force them to make choices on where to spend their discretionary savings and dollars on. And we certainly [want to] keep the RV lifestyle moving in the right direction in terms of demand, but we also take very seriously the price increases that we ask of the market, because we're fully aware that they could have an impact in the future in terms of slowing demand. So, we'll look on anxiously as everybody else does as to how some of these topics are resolved.
While Winnebago doesn't provide forward earnings guidance, its third-quarter results imply that the 2018 fiscal year is likely to close out on a positive note next quarter. The manufacturer has a reasonably healthy backlog that it can tap to record higher sales as its capacity improvements come on line. And the rising popularity of RVs among millennials should bolster critical towable revenue in the near future. For now, Winnebago's task is simply to execute in order to meet vigorous demand.