Investors weren't expecting much from recreational vehicle giant Winnebago (WGO +4.14%) in its fiscal third-quarter report. The industry is in a funk right now, with shipments declining in 2019 after rising at a double-digit pace for the last nine years. That slump had Wall Street predicting just a minor sales uptick to reverse the prior quarter's 8% decline.
In recent months, the RV specialist has shown that it can protect sales and profits better than peers, and those encouraging trends continued in the third quarter. However, Winnebago's revenue still took a surprising turn lower due to challenges in its motorhome segment.
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Struggles with motorized homes
Winnebago's towable segment continued to shine thanks to the dual-brand portfolio that management created by acquiring the Grand Design franchise in 2017. Towable sales jumped 11% in the third quarter, which stacked up well against rival Thor Industries (THO +2.97%) and its brutal 23% decline. Winnebago found plenty of room to boost profitability on towables, too, with adjusted profit margin improving to 16.5% of sales from 14.5% a year ago. Higher prices more than offset increased input costs.
The motorhome segment fared much worse, with sales down 35% compared to Thor's 23% slump. Winnebago had signaled that RV shipments would be weak this quarter, mainly because dealers are reducing their inventory levels to better match up with slower sales. Yet the revenue stall was amplified by production missteps. Winnebago couldn't source enough of a key input, leading to insufficient availability of a few of its most popular products. That challenge ensured that sales fell 6% overall, while most analysts who follow the stock were predicting a 2% increase.
Backlog issues
The backlog metric, which describes orders likely to ship to dealers over the next six months, was mixed. It fell by just 6% in the motorhome division, in part thanks to those supply-disrupted shipments being pushed into the next quarter. Towable RV backlog fell 24%, which indicates that dealerships are still working to reduce their inventories. Thor's comparable figure fell 30%.
Executives expressed confidence that stability was slowly returning to the business. "The imbalance between industry wholesale shipments and retail sales continues to improve," CEO Michael Happe said in a press release, "and will continue to do so in the back half of calendar 2019."
Challenges ahead
In addition to the ongoing inventory adjustments, Winnebago noted two significant challenges to the business over the next few quarters. The input supply disruption issue isn't fixed yet, and executives say they "remain focused on seeing that situation improve." Until it does, the motorized RV business might see more sales declines. Winnebago is also bracing for tariff-based price increases to hurt its manufacturing costs over the next six months.
The good news for investors is that these issues aren't expected to change the broader operating picture. That includes modest market-share growth and healthy profitability, just as Winnebago achieved in this most recent quarter. Demand for its newest products is strong, management says, even though dealers are adjusting inventory levels following nine years of double-digit sales growth.
Still, Winnebago is likely to see difficult operating conditions through the rest of 2019 that might send sales and operating income lower. Investors won't have a good reading on whether the business can return to growth in 2020, meanwhile, until conditions stabilize over the next few months.
