Shares of RV maker Winnebago
Profits per diluted share came in at $0.40 -- a 23% drop year over year, but $0.02 better than the analysts were hoping to see. In contrast, Winnebago sold only $220 million worth of vehicles, considerably less than the $246 million that had been predicted. So -- better-than-expected profits on lower sales? Sounds like the company did exactly what CEO Bruce Hertzke has been saying it would do for months: hold the line on prices.
In yesterday's Foolish Forecast, I promised to look especially closely at the company's market-share update today. As you may recall, Winnebago has been tacking against the competition in a difficult market for "discretionary purchase" motor homes. While competitors have been cutting prices in an effort to move products, Winnebago is committed to maintaining its profit margins, even at the cost of lost sales. That's exactly what seems to have happened this quarter.
But the company isn't stupid. It's not actually trying to lose sales. To help give buyers a reason to pay its higher prices, Winnebago has been offering more attractive products to give cost-conscious purchasers a reason to buy. It introduced two new, more fuel-efficient Class C motor homes in Q2, and two more in Q3. The company credits these improved offerings with helping to expand its combined Class A and Class C market share to 19.1%.
Mind you, "expansion" is in the eye of the beholder . and the press-release writer. Winnebago has a better market share now than it did a year ago, but its market share is down slightly from its last-reported 19.3%.
Winnebago's best news seems to deal with inventories. With sales falling 14%, you'd ordinarily want to see both accounts receivable (A/R) and inventories fall by at least that much. A/R came close to that goal, falling 10%. Meanwhile, inventories declined a stunning 32% year over year. That superb performance in converting goods to cash has helped Winnebago produce a whopping $86.6 million in cash profits (free cash flow) so far this year, up 24% from the $69.7 million generated in the first three quarters of fiscal 2005.
In other words, Winnebago's accounting profits may be down on the year, but its cash profits are way up. Mr. Market seems to have recognized this, and bid the shares up accordingly.
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Fool contributor Rich Smith has no interest, short or long, in any company named above.