Winnebago's Profit Rises And Revenues Fall Less Than Expected - Polaris (NYSE:PII)

Investors were optimistic heading into Winnebago Industry Inc.'s WGO fourth-quarter earnings report as the company's shares broke into a new 52-week high on Monday, hitting a peak of $43.01. And the investors sentiment was on the right track. The RV industry seems to be contracting following a nine-year record growth and although the leading outdoor lifestyle product manufacturer's first annual sales decline was expected, revenues have fallen less than expected. And there's the additional bonus being that Winnebago's operating trends have been stronger than peers like Thor Industries THOR through this industry slump.

Earnings Report

The fourth fiscal quarter that ended on August 31, 2019 had revenues of $530.4 million. This is a 1.1% decrease compared to the same period in the fiscal 2018, which was $536.2 million. Gross profit of $83.2 million decreased 0.8% comparing to the same quarter of the 2018 fiscal year. But, the gross profit margin increased to 15.7% in the quarter due to a favourable mix from the accelerated growth of the towable segment, which had $307.0 million in revenues for the quarter, up 6.3% over the prior year. Operating income also decreased, 2% to be precise, comparing to the same quarter of the previous fiscal year, reaching $44.8 million for the quarter. However, the fourth quarter of the fiscal 2019 year had a net income of $31.9 million which is an increase of 7.0% compared to the same quarter last year.

The company's bottom line was favorably impacted by an improved tax rate

The improved tax rate from the Tax Cuts and Jobs Act did help net income and earnings per share but they were also hit by $0.7 million of diligence costs from the Newmar acquisition that was announced in September and that resulted in $0.02 earnings per share drop.

The Successful Mix

The towable segment has continued its success route from the previous quarter when its sales went up 11% whereas its greatest rival Thor Industries dipped more than double, 23% percent to be exact. For the full Fiscal 2019, revenues for the Towable segment increased 6.2% from the previous year reaching $1.20 billion.

Other than profitably strengthening the company's core business, Winnebago also managed to have a successful first year in the marine industry. Despite competition and industry headwinds, the company managed to deliver record profitability.

Concern

The motorhome division had a surprising 35% slump in the third quarter that management attributed to a production bottleneck. The manufacturing issue was resolved so that rate of decline was expected to improve to around 6%. If it reported a double digit, it would suggest more stubborn problems and not a hiccup. Well, overall, the segment's fourth quarter revenues were 12.2% comparing to the same quarter of the previous year due to Class A and Class C weaknesses that managed to offset Class B's improvement. As for the whole fiscal 2019, revenues dropped 17.9% from the previous year, reaching $706.9 million. Passing along tariffs in increased prices didn't cause any problems before and the company still manages to offset them with its pricing strategy and favourable product mix coming from the shift to towable products with higher profit margins comparing to motor homes.

Competitive Environment

Although Thor Industries Inc is moving upward, Winnebago's rival is not as profitable when compared to its industry peers. Thor's shares have a lot of mixed reviews despite its reasonable ROI potential, the company is just not doing so well after accounting for expenses. On the other hand, Polaris Industries PII announced strong third quarter results on Tuesday causing its shares to go up 10.8%. The company's sales exhibited a 7% year on year growth to $1.772 billion. For the full 2019 fiscal year, the company believes that it will achieve 12% sales growth which is the bottom of its previously expected range, while expecting an improvement in earnings, with the range being $6.20 to $6.30 per share. So, the market seems to have forgiven the company's slight top-line miss due to its profitability.

Outlook

Winnebago needs innovative products released at a steady pace to keep the excitement going. Many find that the RV industry growth is slowing down as an indicator of the weakening global economy. Tariffs as well as increased costs of aluminium and steel surely won't help. Investors will surely keep an eye to see whether the motorhome segment will stabilize and return to growth. The newly acquired Chris-Craft boat unit has its role in increasing capacity but it's the company's push of towable products that is protecting its profitability and helping it to thrive in a competitive environment.

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