EUR 850.00 For Business Accounts Only

Morningstar | Winnebago's Fiscal Second Quarter Shows the Smooth Sailing Is Over for This Cycle

We are not changing our fair value estimate for Winnebago Industries following second-quarter fiscal 2019 results that reflect a slowdown but no imminent recession. Revenue fell 7.6% year over year to $432.7 million, which missed consensus of $461.9 million, but diluted EPS of $0.60, which excludes an $0.08 tax benefit for research costs, beat consensus of $0.59. Continued cost improvements in the motorhome segment helped gross margins expand 100 basis points and gross profit only declined by 1.8%. These internal improvements matter because they help mitigate large SG&A increases for consulting costs mentioned on the first quarter call to supplement internal talent on several strategic projects. We suspect those costs will continue for a while and second quarter's SG&A increased 15.7% year over year. CFO Bryan Hughes said 12 percentage points of that increase came from the strategic projects and the Chris Craft boating acquisition and related amortization.

We calculate free cash flow for the quarter improved to a burn of $12.8 million from negative $20.7 million in second quarter fiscal 2018. First half fiscal 2019 free cash flow of $28.6 million is up from just $3.4 million despite an $11.7 million rise in capital expenditure, mostly due to an inventory reduction as dealers across the RV space are right sizing inventory for the spring selling season. Although management has identified working capital improvements for the second half of fiscal 2019 beyond inventory, we think Winnebago needs a strong top-line performance to have good cash flow in the second half of the year. Management estimates a $0.02 EPS hit in both the fiscal third and fourth quarter for closure of the Oregon motorhome plant. Moving all Class A production back to Iowa is expected to bring $4 million in annual cost savings starting in fiscal 2021.

We don't expect as strong of a spring selling season as recent years as we feel we are late in the business cycle, but management says its healthiest dealers are getting stronger and consumers' access to credit remains solid. RVIA wholesale unit data for the U.S. industry has declined year over year every month since May 2018 except in July. The deltas were especially bad to start 2019 with a 40% fall in January and a 15% fall in February, with large declines in both motorhomes and towables. Times like this are when the Winnebago brand for motorhomes and the company's Grand Design brand in towables, along with sufficient liquidity, generally enable the company to outperform the industry's sales trends. CEO and president Michael Happe said northern RV dealers are behind southern dealers in rightsizing their inventory which is one reason we are not looking for a blowout spring selling season.