Global recreational vehicle (RV) manufacturer Thor Industries (NYSE:THO) reported weaker sales in the second quarter of its fiscal 2019 in its financial results released on Wednesday. As we'll see below, the company is in the process of adjusting its inventories to better align with dealer demand. Note that in the discussion that follows, all comparative numbers refer to the prior-year quarter.
Thor Industries: The raw numbers
|Metric||Q2 2019||Q2 2018||Growth (YOY)|
|Revenue||$1.29 billion||$1.97 billion||(34.5%)|
|Net income||($5.4 million)||$79.8 million||N/A|
|Diluted earnings per share||($0.10)||$1.51||N/A|
What happened with Thor Industries this quarter?
- Industrywide shipments to dealers have decreased as dealers continue to work off excess inventory on their lots following a flurry of orders over a time frame corresponding to the first nine months of Thor's previous fiscal year. Accordingly, Thor has tweaked its production levels, dropping to four-day workweeks at some plants and slowing unit production at others.
- Due to the slower pace of manufacturing, and given the upcoming spring and summer high season for RV sales, Thor projects that its finished goods inventory will decline in the coming quarters. Finished goods inventory was elevated at quarter-end due to unusually cold winter weather that forced the company to shut down most of its production facilities for several days at the end of January.
- This right-sizing of inventory is key to Thor's goal of balancing its production with current dealer demand (and ultimately, retail sales) to rejuvenate sales growth.
- Towable segment RV sales fell 35.6% to $881.6 million, as a drop in unit volume was partially offset by a shift to higher-priced units.
- Motorized segment sales decreased by 33.6% to $371.5 million. Management also cited the dynamic of lower volume partially mitigated by higher-priced product as the underlying factor in the revenue slump.
- Towable backlog decreased to 55% to $810 million, while motorized backlog dropped 35% $639.9 million. Thor pointed to its capacity investments over the last two years, improved delivery times, and dealers' inventory adjustments as key forces driving the backlog reductions. Management stated that total backlog has returned to a more normalized level after the record readings seen in early fiscal 2018.
- Gross margin slipped by 270 basis points to 11%, a result of diminished sales. Management also attributed the slimmer gross profits to relatively higher discounts and promotions, which in the previous quarter were atypically lower due to robust retail demand.
- Thor closed its acquisition of European RV manufacturer Erwin Hymer Group (EHG) on Feb. 1, one day after quarter-end. The acquisition excludes both EHG's North American operations and its Canadian "Roadtrek" brands. This carve-out resulted in a purchase price reduction of $194 million from the original $2.4 billion deal value, and reduced Thor's assumed liabilities by $205 million.
- During the quarter, Thor incurred $42.1 million in acquisition costs related to the transaction. These costs pushed the second quarter into a loss on a net income and per-share basis, as seen in the table above.
What management had to say
In Thor's earnings press release, CEO Bob Martin shared a positive outlook on the upcoming high season for RV sales, while cautioning investors about continuing top-line challenges:
We made considerable progress on a number of fronts in the second quarter, supported by a positive start to the 2019 retail show season, with a number of the larger shows posting strong attendance levels, which supports our view of a stable long-term retail environment. We were also pleased to have closed our acquisition of EHG just after the end of the second quarter. This transformational acquisition represents a major step forward in our long-term strategic growth plan, and our entire team is focused on integrating EHG and providing strong returns for our shareholders. While we are optimistic for the long term, we also expect to face challenging conditions in the near term, as dealers continue to reduce inventory levels and we experience difficult comparisons to the record third-quarter results posted in fiscal 2018.
Thor Industries doesn't provide quantitative guidance, but Martin's comments above indicate that the fiscal third quarter will, like Q2, reveal a drop-off from the record results of the comparable prior-year period.
Thor may be right-sizing its inventory, but the market has already right-sized the stock: It has fallen roughly 50% over the last 12 months. I've recently argued that given Thor's relatively cheap valuation, and its ambitious acquisition of EHG, which has created the largest RV manufacturer in the world, bargain hunters could do worse than acquiring a few of these currently unpopular shares.