Investors had a few big concerns about Winnebago's (WGO +1.57%) business trends heading into this past week's report. For one thing, the recreational vehicle market is slowing in 2018 after expanding at a double-digit pace in each of the last eight years. And three months ago the manufacturer revealed profitability struggles in its motorized RV segment that could worsen due to rising prices on steel and aluminum.
The company put those concerns to rest in its fiscal third-quarter report last Wednesday, at least for the short term.
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Growth is holding up just fine
Winnebago posted slowing backlog growth in late March, and that led Wall Street to project just a 14% sales uptick for the quarter. Winnebago outpaced that result, landing on an 18% revenue gain, up to $562 million.
The growth was mainly due to a 33% spike in its towables division as both the Winnebago brand and the newly acquired Grand Designs brand gained market share. The motorized RV segment sped up slightly, too, rising to a 3% increase from 2% in the prior quarter. Most importantly, executives noticed healthy demand for Winnebago's latest product lineup. "Our new product launches are performing well," CEO Michael Happe said in a press release.
Costs are under control
Gross profit expanded at a faster pace than sales, as did operating income, leading to increased profitability. Investors had been worried that margins would be headed in the other direction. After all, executives warned in March that investments in the motorized division would hurt results for at least the next few quarters. Winnebago's rival Thor Industries, meanwhile, revealed lower gross margin in its most recent report, and management complained about rising prices tied to the announcement of new steel and aluminum tariffs.
Winnebago avoided that fate thanks to the combination of a few positive trends, including the shift in its sales toward higher-margin towable products, cost cuts, and targeted price increases that didn't send RV shoppers bolting to competitive brands.
A bright outlook
The best news for investors in this report had to do with Winnebago's positive outlook. The company doesn't issue sales projections, but several metrics pointed to robust gains ahead. Backlog increased 15% in the towables segment, and management is confident enough about the long-term runway here that it is currently expanding its production capacity. The RV backlog jumped at an even stronger 30%
Winnebago's dealership inventory position is healthy, too, with inventory levels ticking up by less than 2%. That suggests dealers aren't under elevated pressure to cut prices, and the products sitting on lots today are some of its newest models.
The company's best guess today is that the industry will expand at a roughly 8% rate this year to mark just a modest slowdown from 2017. Winnebago expects to win market share, and so its sales gains should exceed that figure. Spiking raw material costs, in addition to rising interest rates and worsening consumer sentiment, remain risks to that growth performance.
On the plus side, Winnebago's new-product introductions, especially in the towables segment, might push sales gains and profitability higher. Looking further out, management is excited about the opportunity in its new marine market, and in the growing field of electric vehicles.
Yet for now its latest results appear to keep it on pace to meet its broader goals of steadily gaining market share while raising operating margin to 10% of sales by 2020, up from 7.7% two quarters ago and 8.6% today.
