Thor Industries (NYSE:THO) released fiscal first-quarter 2020 earnings on Monday before the markets opened for trading, and it received an expected boost from European sales due to its February 2019 acquisition of Erwin Hymer Group (EHG). The recreational vehicle (RV) manufacturer's North American sales continued to decline, however, although management did indicate that ongoing dealer inventory rationalization was nearly complete. Let's dive into the quarter's pertinent details below, bearing in mind that all comparative numbers refer to the prior-year quarter.

Thor Industries: The big-picture numbers

Metric Q1 2020 Q1 2019 Change
Revenue $2.16 billion $1.76 billion 22.7%
Net income $51.1 million $14.0 million 365%
Diluted earnings per share $0.92 $0.26 353.8%

Data source: Thor Industries.

Key highlights from the quarter

  • North American towable RV sales decreased by 6.3% to $2.0 billion as dealers continued to adjust inventory on their lots to match retail demand. A greater proportion of higher-priced units partially offset the impact of lower shipment volume.
  • North American motorized RV sales dipped by 3.5% to $415.9 million. Management cited a shift in product mix to lower-priced models as the primary factor behind the weaker sales.
  • European RV sales of $493 million were responsible for the company's overall 22.7% top-line increase. Management noted that the first quarter of the fiscal year is typically the European business's slowest quarter; shareholders can expect sequential sales acceleration in the following quarters.
  • North American towables backlog increased by nearly $49 million to $1.07 billion, while motorized backlog fell by $70.3 million to $670 million. Adding in the European backlog, Thor's total slate of unfilled orders hit $3 billion at quarter-end, a sequential increase of 50% from the $2 billion mark at the end of the fiscal fourth quarter of 2019.
  • Gross margin jumped 250 basis points to 14.3%. Thor attributed the sharpened gross profitability to numerous management actions resulting in reduced material, labor, and warranty costs, as well as the shift to higher-margin vehicles in the North American towables segment. As I've discussed in recapping Thor's earnings earlier this year, the company has tweaked production schedules to meet a slightly lower demand level, and initiatives like this are starting to manifest in better margins.
  • Thor's net earnings jumped due to a favorable comparison to the prior year, as the company incurred $57.1 million in one-time transaction costs for the then-pending EHG merger in the third quarter of fiscal 2018.
  • The organization relayed to shareholders that it's now paid down roughly $500 million in debt on the $2.4 billion in financing undertaken to complete the EHG transaction. As of the Oct. 31 balance sheet date, Thor has $1.78 billion of long-term debt on its books, versus $1.89 billion at the end of the prior sequential quarter.
A man holds a cup of coffee and smiles outside his RV camper.

Image source: Getty Images.

Management's observations

In Thor's earnings press release, CEO Bob Martin commented on both the company's higher gross profitability and the performance of the European segment:

In our fiscal first quarter, we achieved a pronounced improvement in our operating results, reflecting the benefits of the flexible and highly variable cost model we have developed, as we increased gross profit margins in our North American RV segments despite modest decreases in net sales. EHG's results for the quarter were generally in line with expectations as EHG has historically generated flat-to-negative first quarter results due to the European holiday shutdowns that occur in August, and due to the higher concentration of marketing and advertising expenses in the fiscal first quarter to support the annual RV shows in Europe.

The outlook

Thor doesn't provide investors with quarterly or yearly earnings guidance. However, in the company's earnings press release, CEO Martin communicated Thor's belief that dealers' right-sizing of inventory on their lots over the last few quarters would finally be completed by the end of the current calendar year. Thor sees a flat or slightly declining North American RV market in 2020, with the potential for a strengthening of retail demand, as well as modest retail growth in the European market.

The company also reiterated aggressive longer-term goals first shared during its recent investor day in Germany. These include annual sales of $14 billion, a "sustainable" gross margin of 16% (Thor's annual gross margin has historically ranged between 12% and 14%), and the generation of cumulative net cash from operations of $3 billion between now and the completion of fiscal 2025. Nonetheless, shareholders of the consumer discretionary investment appeared to focus more on the soft North American market and the rather tepid results of the current quarter: Shares were trading down roughly 4% at midday on Monday.

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