The start of the spring selling season is a risky time for a recreational vehicle manufacturer like Winnebago (NYSE:WGO), as its new lineup of products meets its first big test with consumers. On top of that challenge, the RV giant had to deal with spiking raw material costs that threatened to hurt profitability.
Winnebago overcame those issues to post healthy growth in sales and profits in its most recent quarterly report. Following the announcement, CEO Michael Happe and his executive team held a conference call with Wall Street analysts to put the results in perspective and detail their latest thinking on the fiscal year trends. Here are a few highlights from that presentation.
Building more towables
We continue to see growth in the overall towables RV market and are pleased that Winnebago Industries continues to take both retail and wholesale market share with both of our brands. Our confidence in our performance is reflected in our capacity expansion efforts.
-- CEO Michael Happe
The towable RV segment powered Winnebago's market-thumping growth this quarter, with deliveries up 31% to 2.3 million. The demand was broad-based, management said, and lifted both the Winnebago brand and the recently acquired Grand Design portfolio. These products generate far higher profit margins, too, which helps explain why gross profit is up to 14.6% of sales over the last nine months, from 13.6% in the prior-year period.
Executives said they see no impending slowdown and in fact noted that challenges are on the supply side of the equation right now. That's why the company is aggressively expanding capacity, including by launching expansion projects in both the Winnebago and Grand Design production lines this quarter.
We remain laser-focused on addressing the challenges facing our motorized business and continuing to make the foundational improvements to enhance our overall product portfolio and drive profitability.
The motorized segment wasn't as robust, with sales rising just 3.1% as adjusted profitability sank to 3.7% of sales in the third quarter, compared to 6% a year earlier. Management pointed out that growth trends edged up slightly when compared to the prior quarter, but repeated its claim that the recovery will take time. Winnebago is tinkering with its motorized RV portfolio by obsoleting brands that aren't fitting the growth strategy. While warning that these won't be "overnight fixes," executives explained that the end product should be a leaner, higher-volume portfolio.
We ... subscribe to the recent [Recreational Vehicle Industry Association] 2018 shipments forecast, projecting an approximate 7.5% increase in 2018 versus 2017. This is yet another shipment record projected as more consumers find the appeal of the RV lifestyle the right choice for their discretionary investment.
The RV market has expanded at a double-digit pace for eight consecutive years. It appears set to decelerate in 2018 while still growing at a healthy clip. And, while cautioning about potential risks like rising costs, higher fuel prices, and increased interest rates, management was positive about the short-term outlook.
The company noticed robust traffic at dealerships through the early spring weeks and noted no pressure to cut prices. Winnebago's inventory position is strong, too. Notably, order backlog was healthy on both the towable and motorized portions of the business, which executives said was due to new products -- like the 4X4 Revel -- that have resonated with dealers and consumers. The expanding industry trends should help Winnebago keep sales marching higher as it works out the kinks in its motorized fleet production -- all while working toward its goal of a 10% operating profit margin by 2020.