The dream of the open road has appealed to would-be retirees for decades, and Winnebago Industries (NYSE:WGO) epitomizes the vision of travelers who have the time on their hands to bring motor homes and recreational vehicles on long vacation trips. For years, high fuel prices weighed on the ability of those with fixed incomes to handle the costs of large RVs, but many expected the plunge in energy prices would lead to higher sales for Winnebago. Yet in Thursday morning's fiscal-second-quarter financial report, Winnebago gave investors a major disappointment, as sales only inched higher and profits actually fell from year-ago levels. Can Winnebago bounce back going forward in 2015? Let's take a closer look at Winnebago and why it fell so far short of hopes.
A rough road for Winnebago
Winnebago's latest results fell short of everything those following the stock had wanted to see. Revenue rose from the year-ago level, but growth slowed to just 2.5%, with sales of $234.5 million coming in more than 7% short of analysts' $253 million consensus forecast. Similarly, although investors had expected earnings to climb almost 10% from the year-ago level, Winnebago's net income dropped almost 16% to $8.1 million, with earnings of $0.30 per share coming in $0.08 per share shy of the consensus.
A combination of factors led to the disappointing results. The company's towables segment grew impressively by almost 12%, with a nearly 8% rise in average selling price and better than 5% growth in unit shipments. But despite an 18% jump in motor-home retail registrations during the quarter, revenue from the segment climbed only 2.4%, with that increase due solely to shipment volume increases as prices remained roughly flat. Moreover, an increase in overhead costs weighed on operating margin. General and administrative costs soared by more than half to $7.46 million, cutting the operating margin by a full percentage point.
Winnebago has also seen a massive shift in its product mix. Demand for Class A motor homes, which are typically the largest and most luxurious, has dropped precipitously, as deliveries fell 22% from the year-ago quarter and backlogs were down by almost half. On the other hand, demand for other classes of motor homes has soared, with deliveries in the key Class C market jumping 25% and backlogs rising by 8% from the year-ago period.
CEO Randy Potts took the results in stride. "We grew revenues and improved gross profit margin despite continuing to work through the labor-related constraints and challenges we saw last quarter," Potts said in a prepared statement, and "we also incurred higher operating expenses, in large part attributable to the commencement of our new [enterprise resource planning] system and strategic sourcing projects, which we believe will improve Winnebago's efficiency and profitability once complete."
How Winnebago can drive ahead
The key question is whether Winnebago sales will rise as the key spring and summer seasons in North America approach. The company is optimistic about its backlog, especially as bookings for motorized units have jumped 59% over the past year.
The towables segment has been an especially positive business for Winnebago, and that led the company to buy its Indiana assembly facilities. With the transaction expected to close next month, purchasing the previously leased facilities will cost $5.4 million but potentially produce substantial cost savings going forward. As the company looks at ways to control expenses, similar moves will be essential to maintaining bottom-line growth.
Despite Winnebago's own spin on its report, shareholders weren't impressed, and the stock was down more than 14% by 11:30 a.m. With so many investors having expected the promise of cheaper travel to raise interest in motor homes and recreational vehicles, Winnebago will have to show it can take advantage of favorable trends in the quarters to come if it wants to pull itself out of its slump and get its stock price moving in the right direction.