Global recreational vehicle (RV) giant Thor Industries (NYSE:THO) finished its fiscal 2019 year with signs of heightened 2020 activity in the tea leaves. The company enjoyed a top-line boost from its fiscal third-quarter 2019 acquisition of European RV manufacturer Erwin Hymer Group (EHG). While sales at core North American RV segments lagged behind, fourth-quarter results released Monday indicated that demand should tighten later in the new fiscal year. As we parse the details of the last three months below, note that all comparative numbers refer to the prior-year quarter.
Thor Industries: The raw numbers
|Metric||Q4 2019||Q4 2018||Change|
|Revenue||$2.31 billion||$1.87 billion||23.5%|
|Net income||$92.5 million||$88.2 million||4.8%|
|Diluted earnings per share||$1.67||$1.67||0%|
What happened this quarter?
- North American towable RV segment revenue declined by 17.6% to $1.16 billion. Lower unit volume was partially offset by improved product mix, which favored higher-priced vehicles. The quarter's sales decrease represented an improvement versus the entire year's decline of 23% against fiscal 2018 sales.
- North American motorized RV revenue slipped by 8.1% to $387.4 million on weaker unit volume and a greater proportion of lower-margin Class C motor home sales.
- EHG, which is reported as its own segment (European RVs), contributed $719 million in sales during the quarter. This revenue essentially supplied Thor's entire quarterly top-line advance against the prior year.
- Gross margin rose 140 basis points to 14.4% due to improved gross profit in the North American towables segment, which management attributed to lower materials, warranty, and labor costs.
- Order backlog in the North American towables and motorized segments dipped roughly 18% to $1.2 billion. Including European RVs, total consolidated backlog of $2 billion decreased marginally from a back-order tally of $2.1 billion in the last sequential quarter (fiscal Q3 2019).
- Management noted that operating cash flow increased to $508 million in fiscal 2019 against $467 million in the prior year and also pointed out that Thor has already paid down $480 million in EHG acquisition-related debt over the last two quarters. Thor's long-term debt balance at year-end stands at roughly $1.9 billion.
- Earnings per share (EPS) remained static at $1.67 despite the company's rise in net income, as new shares issued in conjunction with the EHG transaction diluted the improved earnings.
What management had to say
In Thor's earnings press release, management outlined two top priorities for fiscal 2020: continuing the successful integration of EHG and strengthening the company's balance sheet (via further debt reduction). CEO Bob Martin disclosed that Thor has created an international product transfer team that will oversee the distribution and sale of EHG products in North America. Martin stated the following on current progress:
Our expansion into the European RV market represents a first step in our long-term goal of growing our business beyond North America and capitalizing on global growth opportunities. Our integration plan is proceeding, and we have made measurable progress in a number of areas. We are developing a culture of collaboration among our companies at the same time as we integrate EHG into the Thor family of companies. This collaboration will focus on near-term opportunities to adopt global best practices in purchasing to capture cost efficiencies, and sharing best practices in R&D and product development among our companies.
The CEO also mentioned that Thor anticipates transferring some of EHG's advanced production technologies to its North American subsidiaries to cut down on warranty costs and provide a higher-quality offering in the domestic and Canadian RV markets.
Thor has wrestled all year with dealer inventory rationalization in North America as retail RV sellers struggle to work down their lot inventories to better fit normalizing consumer demand following a monster year in 2018. The company relayed on Monday that dealer inventories have fallen 25% from their peak at the end of fiscal 2018 and are 6% below year-end fiscal 2017 levels. Thor's management believes that demand is picking up but warned investors that dealer adjustments are likely to continue through the first half of fiscal 2020. Thus, North American markets will experience a "flat to modest decline" in the near term.
This would represent a significant improvement over the double-digit sales declines in the towables and motorized segments in fiscal 2019 and likely boost the attractiveness of this consumer discretionary stock, given the implication of higher sales in the back half of the new year. Indeed, an improved outlook was one of the primary factors that juiced Thor's stock by more than 15% in Monday's trading session.