Cheap gasoline prices are often a boon for the recreational vehicle industry, and Winnebago Industries (WGO 2.12%) stands to gain the most from an uptick in RV interest, with gas at its lowest levels in years. Yet coming into Thursday's fiscal first-quarter financial report, Winnebago investors weren't confident about the company's ability to keep growing, expecting relatively flat performance as the approach of the end of the year typically pushes more discretionary income toward purchases of snowmobiles in which Arctic Cat (ACAT) and other winter-sports equipment manufacturers specialize. As it turned out, Winnebago shareholders' fears were justified, as the company's results were far weaker than most had expected. Let's look more closely at how Winnebago did and what it says about the RV maker's future.
Winnebago can't keep rolling
Winnebago's fiscal first-quarter results showed that the company has gone through greater challenges than most of those following the stock had thought. Revenue dropped 4.5% to $214.2 million, which was far worse than the nearly 1% growth rate that most investors had expected to see. Net income dropped 13% to $8.6 million, and that produced earnings of $0.32 per share, a nickel short of the consensus forecast among investors.
A closer look at the results in Winnebago's product lines showed a continuation of the trends that investors have seen in recent quarters. Large class A diesel RV deliveries plunged more than 40%, and a drop in gasoline-powered class A RVs produced a 19% drop in deliveries for the class as a whole. Class B motorhomes posted a sizable 27% rise, but nearly flat performance in smaller class C motorhome led to a total volume drop in motorhomes of 5.4%. By contrast, travel trailer sales jumped by more than half, but that wasn't enough to lift Winnebago's total revenue for the quarter.
Backlogs followed the same general pattern. For class A motorhomes, backlogs dropped more than 30%, but gains in other motorhome types offset those declines. A surge of more than 150% in travel-trailer backlogs helped Winnebago, but the dollar amounts involved in these towable products are minuscule compared to the value of motorhomes, and so gains in overall backlog revenue dollars were limited to about 10%.
Winnebago made some progress on the margin front, but it also faced some cost challenges. Gross margins climbed nine-tenths of a percent as Winnebago's strategic sourcing moves paid off with lower costs, along with a more lucrative product mix and lower workers' compensation expenses. Higher warranty expense and what the company called "labor-related manufacturing inefficiencies" offset some of those gains. Moreover, some of the volume gains in the towable segment came at the expense of pricing, with average selling prices falling by more than 17%.
Nevertheless, Winnebago CFO Sarah Nielsen was pleased with the results. "Our bookings were strong leading into the Louisville RVIA show," Nielsen said, "where we showcased new products and unveiled new floor plans. Further, we were very encouraged by the demand we received from our dealer partners at the event."
What's next for Winnebago?
Winnebago has made good business decisions to foster future growth. During the quarter, it announced expansion plans to move production for high-end class A diesel motorhome products to the West Coast, freeing up capacity at its Forest City plant in Iowa to produce class A gasoline motorhomes and class C RVs. With increases in industrywide registrations for motorhomes and towable products, Winnebago thinks it can claim its share of an expanding market.
Still, the RV maker needs to make further moves to keep costs down. During the quarter, general and administrative costs jumped by more than 40%, representing the biggest drag on operating income and earnings. Much of that increase stemmed from implementation of the new enterprise resource planning system, but Winnebago can't afford to keep seeing these issues continue to hold back bottom-line growth.
Reflecting their frustration, Winnebago investors bid down shares of the RV maker by 13% on Thursday, sending the stock near levels it hasn't seen since early 2013. Shareholders need evidence that Winnebago can capitalize on what should be a positive industry environment, and until it does, the stock could remain under pressure.