Like most companies operating in the manufactured housing and recreational vehicle industries, Drew Industries (NYSE:DW) started off the new year with a sales drop. But get this -- this was not just good news, but great news.
Granted, quarterly sales plummeted 17% in comparison to last year's Q1, ending up at $173 million. Also granted, profits were down a good 6% -- but that was much less than expected, and here's why.
Drew knew it was in for a tough quarter, and probably a continued tough stretch as MH and RV makers from Champion (NYSE:CHB) and Coachmen (NYSE:COA) to Fleetwood (NYSE:FLE) and Palm Harbor (NASDAQ:PHHM), to Thor (NYSE:THO) and Winnebago (NYSE:WGO) suffer through the post-Katrina boom of round-the-clock building of temporary housing for hurricane survivors. So management battened down the hatches, pulled in its inventory horns, toughened up on bill collection, and cut costs wherever it could find them -- all the while keeping its eyes open for opportunities to grab market share from industry rivals who were perhaps a bit less quick to react, or a bit less able to survive the downturn.
The net result of all this cost cutting and lean-and-meaning was a 19% drop in the cost of goods sold -- more than the decline in sales, and a reduction in selling, general, and administrative expenses of 12% -- a yeoman's effort. What's more, these efforts should stand Drew in good stead going forward, as the firm is seeing renewed upwards pressure on raw material costs which will squeeze operating margins mightily. As when faced by this problem in the past, Drew intends to seek price increases from its customers -- but also as before, Drew will be cementing customer loyalty at the expense of its own profit margins by passing along raw material price increases "at cost," with no mark-up for profit.
Foolish takeaway
Drew has readied itself for continued turbulence in the industry, improving its own chances of surviving. Moreover, as weaker rivals flounder, a healthy Drew will be able to continue its stated goals of snapping up those rivals, gaining market share from those it doesn't buy, and getting bigger, ever bigger.
Draw yourself a map of Drew's progress with:
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Fool contributor Rich Smith does not own shares of any company named above. The Fool has a disclosure policy.
