Investors are optimistic heading into Winnebago's (WGO 6.26%) fourth-quarter earnings report. The leading recreational vehicle manufacturer is sure to announce its first annual sales decline in years as the RV industry contracts following a nine-year record run. However, Winnebago's operating trends have been stronger than peers like Thor Industries (THOR) through this industry slump. The company's push into towable products is protecting profitability, too.
On Wednesday, Oct. 23, we'll find out whether those positive trends continued into the fourth quarter, but the biggest news will center around metrics like inventory and backlog that inform management's official outlook for fiscal 2020.
Let's dive right in.
Motor home sales
Winnebago's towable segment was a standout success in the last quarterly report, with sales rising 11% compared to a 23% drop for rival Thor Industries. Another boost for that division is likely this week, and that success should help keep Winnebago's broader sales decline at around 3%, if you go by what most investors are expecting to see on Wednesday.
The bigger questions are around the consumer discretionary company's motorized home division. That segment posted a surprising 35% slump in the third quarter that management attributed partly to a production bottleneck. That manufacturing issue was resolved over the last few months, and so investors are expecting to see that rate of decline improve to around 6%. Another double-digit drop, on the other hand, would suggest Winnebago is dealing with more stubborn problems than just a simple manufacturing hiccup.
The company has had no problem passing along rising tariff costs to customers lately. In fact, gross profit over the last nine months has increased to $224 million, or 15.4% of sales, from $216 million, or 14.6% of sales, in the prior-year period.
A lot of that gain is coming from the shift toward towable products that carry higher profit margins than motor homes. Expect to see this trend continue into the fourth quarter and likely through 2020 at least. But Winnebago also needs a steady pace of innovative product releases that keep excitement going for its twin brands, Winnebago and Grand Designs. The best way for investors to judge that consumer enthusiasm is to follow how gross profitability changes over the next few quarters, especially as the motor home division stabilizes and then returns to growth.
The 2020 outlook
Winnebago offers a few key forward-looking metrics in its reports, and these are the numbers that can move the stock price in the hours immediately following quarterly results. The biggest is backlog, which describes orders set to be delivered over the next six months. Together with inventory, that metric gives a good indication of the balance between supply and demand at RV dealerships around the country.
All told, Winnebago is on pace to win market share in fiscal 2019 even as the industry contracts at a roughly mid-single-digit pace following a sales surge in 2018. CEO Michael Happe and his team believe that drop is just a temporary problem, though, and they're backing up that prediction by pouring investments into adding capacity on both the towables segment and the newly acquired Chris-Craft boat unit. If Winnebago predicts stable or rising volumes ahead, the company's 2020 sales outlook on Wednesday would go a long way toward supporting that aggressive growth posture.