For weeks, investors have been bracing for bad news from Winnebago (WGO 4.63%) in conjunction with its first earnings report since the COVID-19 containment efforts began affecting its network of over 600 dealers around the country. The recreational vehicle giant pre-empted some of that news when it announced the suspension of manufacturing activities on Mar. 23 due to slumping RV demand.
Two days later, in its fiscal 2020 second-quarter earnings results, the company provided details about how it's preserving cash and slashing costs to navigate the disruption in its industry. Executives also highlighted Winnebago's positive market share momentum in the months before the coronavirus began depressing commerce in the United States.
Let's take a closer look.
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Another good quarter
Winnebago's fiscal second quarter, which ended Feb. 29, was strong. Organic revenue rose 13% year over year, and that growth improved to 45% after including the boost from its recently acquired Newmar business. Revenue increased in the towables segment, which jumped 13%, and in the motorhome division, revenue was up 14% on an organic basis and 98% including Newmar.
The company noted another uptick in market share as it was responsible for just over 13% of all industry sales compared to 11% a year earlier. "Our outdoor brands continue to resonate with consumers," CEO Michael Happe said in a press release, "as reflected in our impressive consolidated results for the second quarter."
Winnebago's finances continued to show lots of noise from the Newmar purchase, with acquisition-related expenses helping push gross profit margin lower. Operating income for the quarter landed at $30 million, or 4.7% of sales, compared to $30 million, or 6.7% of sales, a year ago. Still, management said the integration process is going according to their original plan. "Our more diversified line of products continues to drive higher margins within the motorhome segment and accelerate our market share gains," Happe explained.
A tough period ahead
Winnebago's order backlog was healthy with 22% volume growth in the towables division and a 52% spike in motorized homes. However, dealership appetite for RVs fell precipitously in the days following the close of the second quarter. The company noted a significant demand drop in mid-March, just when social distancing efforts began in several major metropolitan areas around the country. While the situation is fluid, executives described "what appears to be a very real disruption in both our internal operations and end markets."
In response, Winnebago has shut down most production through April 12, which will reduce costs while helping keep supply more in line with demand trends. That posture, plus additional cost cuts, gives the company plenty of flexibility to weather the consumer-discretionary slump. Winnebago has $123 million in cash on hand and can access an additional $193 million of credit.
Management said the RV industry had achieved solid pricing and inventory levels just before the coronavirus disruption started. Winnebago had also made impressive strides at diversifying its business and separating itself from rivals, as evidenced by its expanding market share.
These factors point to positive long-term results for the leading outdoor recreation brand. However, it's clear that Winnebago will have to endure a significant interruption to its business that may affect more than just its fiscal third quarter.
