The recreational vehicle market's strong cyclical expansion, which produced nine consecutive years of often double-digit annual sales growth, appears to be coming to an end. Costs on important inputs like aluminum and steel are spiking at the same time, and these two trends are liable to create a tough selling environment for RV specialist Winnebago (NYSE:WGO).
Those challenges didn't materially impact the fiscal fourth-quarter earnings results that Winnebago announced on Oct. 17, but CEO Michael Happe and his executive team believe they will be significant in fiscal 2019. Below, we'll take a look at what management had to say on their quarterly earnings call about those challenges, as well as Winnebago's bigger-picture growth trends.
Wrapping up a strong fiscal year
"We enter fiscal 2019 a larger, more diversified and more profitable organization, poised to continue a growth pace that exceeds that of the industries we compete in." – Happe
Winnebago just closed the books on an impressive fiscal 2018. Sales rose 30%, thanks mainly to the acquisition of a new towables business that lifted revenue past $2 billion for the first time. That purchase helped the company become a bigger industry player, with U.S. market share standing at over 8% in the today, compared to below 3% two years ago.
The increase in towable revenues also lifted profit margins higher, which contributed to a 39% spike in earnings for the year.
Keeping margins steady
"The impact that the tariffs have had on spot prices for aluminum, steel and other impacted materials, and the impact these increases have had on our gross margins have generally been mitigated with a combination of cost savings initiatives and pricing." – CFO Bryan Hughes
In sharp contrast to rival Thor Industries, Winnebago announced that it had been steadily profitable last quarter. Gross margin held at about 16% of sales, while Thor's dropped by 3 percentage points to 13%. Winnebago executives credited their ability to find substitutes in many cases for products that had sharp tariffs applied to them. They also found success with cost cuts and limited price increases. However, these wins could prove temporary, executives warned, saying additional tariffs are "really just now beginning to impact our financials."
Short term pressures
"While interest in the RV lifestyle remains robust, we do believe that the industry performance comparisons in the back half of 2018 and early 2019 will continue to be pressured, primarily due to how excessively strong the shipment demand was during those same periods a year ago." – Happe
Winnebago's leadership agrees with their counterparts at Thor that a significant industry slowdown is coming in the next few quarters. While its backlog remains strong, overall dealer inventory levels are elevated. As a result, executives forecast that the industry will transition into a period of roughly flat sales over the next year, in contrast to the double-digit percentage revenue growth of the prior year. But executives were careful to say that they aren't worried that they'll need to make sharp price cuts to move stale inventory.
Happe and his team believe the improvements they've made to the business over the last two years should position Winnebago to both grab market share and protect margins in that flat sales environment; those will be the key metrics for investors to watch in the coming quarters.
Looking further out, management is bullish on the company's long-term growth potential given that several generations of consumers are entering the RV lifestyle. A booming period of truck and SUV sales, for example, has given many more people the horsepower required to add a towable trailer to their vacation tools. Winnebago's challenge today is to balance supply with demand over the short term, while continuing to invest in the business so that it can be ready to take full advantage of the industry's next cyclical upturn.