Editor’s Note: The investment firm of Robert W. Baird & Co. issued a client newsletter after this week’s release of the February towable RV sales report by Statistical Surveys Inc. (SSI). Excerpts from the Baird newsletter follow.
U.S. towable retail up 4% in February. According to data from Statistical Surveys, unit retail sales in major towable categories (travel trailers and fifth-wheels) increased 4% in February, decelerating from the rapid growth in January against a more difficult comparison (+17%). Thor demand remained flat in February, the first month of the company’s fiscal Q3. Winnebago (a smaller player in the towable market) already reported results for the February quarter.
February towable demand grew 4% (travel trailers and fifth-wheels). Travel trailer demand increased 4%, while fifth-wheel retail sales improved 3%. The towable market faced a difficult comparison in February (+17%) and faces an even tougher comparison in March (+22%). Data indicate that towable demand increased 14% through February. After likely adjustments, the SSI data appear to be consistent with the Q1 Baird/RVDA dealer survey. RV dealers told us towable retail improved 9-10% in the first quarter of 2013.
Thor retail flat in February. Thor U.S. travel trailer and fifth-wheel retail remained flat in February, which represents the first month of Thor’s fiscal Q3. Weaker demand in fifth-wheels (-6%) offset growth in travel trailers (+4%). We model Thor North American retail growth of 8% in fiscal Q3, but note that the preliminary SSI data are frequently revised higher.
Winnebago. Winnebago already reported fiscal Q2 results on March 28. Winnebago results implied North American towable retail declined 1% – we use the Winnebago data in our model. Towables represent just 10% of revenue for the company, which entered the market in 2011 with under 1% share — note that given Winnebago’s small market position, even a few incremental units can lead to large swings in growth rates.
Editor’s Note: Robert W. Baird & Co. recently partnered with the Recreation Vehicle Dealers Association (RVDA) to contact 110 RV dealers regarding demand during the first quarter. The following is a summary of the results.
Early-season trends were strong, despite a later start to spring and slower traffic in cold-weather markets. Retail demand improved nicely, up 9% to 10% in both motorhomes and towables. Dealers consider motorhome inventory lean and towable inventory balanced. With dealer confidence soaring, higher absolute inventory levels are fine.
“We remain bullish on fundamentals and would look for a market correction to provide an opportunity to become more aggressive,” Baird concluded.
Solid retail despite later start to spring. Demand for motorhomes and towables improved roughly 9% to 10% in Q1, despite slower traffic in some cold-weather markets. (Raw survey results indicated 18% growth in motorhomes and 26% growth in towables, but we believe a number of multi-location dealers skewed preliminary data). Big picture, we continue to believe that negative equity among RV consumers has begun to evaporate, driving cyclical recovery. The passage of time (the market peaked in 2004) and better used RV values – along with better home prices and a strong stock market – all play a role.
Inventory appears lean-to-balanced. Dealers appear comfortable with inventory levels. Motorhome inventory appears lean as several dealers mentioned unfulfilled orders (consistent with production constraints manufacturers have reported). Towable inventory appears balanced. Recall that towable manufacturers offered large discounts to protect share on dealer lots, a bet that could pay off if retail remains solid. Based on the number of days of inventory reported, motorhome (113 days vs. 102 days) and towable (115 days vs. 106 days) are up.
Dealer sentiment still lofty. Sentiment remains near record highs as dealers anticipate a recovery. One dealer noted, “if sales continue to follow early trending, this could be one of our best years ever.” After a difficult recession, dealers that survived are enjoying better retail, fresh inventory and easier credit. Indeed, just 5% of dealers reported tighter retail credit trends – and no dealer reported tougher access to wholesale credit. Net, the surge in dealer sentiment helps explain the desire to accumulate inventory – a natural re-stocking effect.
Bullish on fundamentals. We remain bullish on RV fundamentals as a solid cyclical recovery unfolds. We believe that negative equity is evaporating, fueling spending in previously dormant markets (RVs, boats, motorcycles). Meanwhile, dealer inventory is lean-to-balanced, supporting a potential restocking effect and better earnings power. Investor momentum has begun to fade, which could provide an opportunity to be more aggressive.
Editor’s Note: The investment firms of Robert W. Baird & Co. issued a client newsletter following this week’s release of the January retail RV sales report compiled by Statistical Surveys Inc. (SSI). Excerpts from the Baird newsletter follow.
U.S. towable retail up 21% in January. According to data from Statistical Surveys, unit retail sales in major towable categories (travel trailers and fifth-wheels) jumped 21% in January — a solid start to the year after U.S. towable demand grew 10% in 2012. Winnebago U.S. towable demand grew 42% in January (with just 1% market share), pushing growth to 22% through the first two months of its February quarter. Thor already reported results for the January quarter.
January towable demand grew 21% (travel trailers and fifth-wheels). Travel trailer demand increased 21% while fifth-wheel retail sales jumped 23%. The growth is a solid start to the year after U.S. towable demand improved 10% in 2012. The towable market faces more difficult comparisons in February (+17%) and March (+22%).
Thor. Thor U.S. travel trailer and fifth-wheel retail grew 19% in January, bringing United States retail growth to 5% during fiscal Q2. Recall that Thor already reported fiscal Q2 results on March 7, so the January data are not incremental to the story.
Winnebago. Towables represent just 10% of revenue for Winnebago, which entered the towable market in 2011 with under 1% share. Nonetheless, demand for Winnebago units grew 42% in January, bringing Winnebago retail growth to 22% through the first two months of the February quarter. We model Winnebago North American retail growth at 45% for the February quarter — note that given Winnebago’s small market position, even a few incremental units can lead to large swings in growth rates. Our above-consensus revenue forecast for Winnebago is unchanged ($182 million vs. $171 million). We model 3% towable shipment growth on a 45% increase in towable retail volume and a 20% jump in dealer inventory. We expect Winnebago to report financial results Thursday, March 28.
Editor’s Note: The investment firm of Robert W. Baird & Co. issued a client newsletter on March 8 following release of the second-quarter financials by Thor Industries Inc., the nation’s leading RV manufacturer. Excerpts from the Baird newsletter follow.
Maintain Neutral rating. Earnings per share (EPS) fell short despite a low tax rate as Thor offered incentives to defend (market) share. We are cutting our estimates to reflect weaker retail demand, higher dealer inventory and further margin pressure. More broadly, we remain optimistic that demand will recover as negative equity evaporates, but remain selective on valuation – especially as inventory grows and market share erodes. We continue to see a recovery in the consumer discretionary sector but believe there are better opportunities outside the RV space.
EPS fall short. EPS fell short of our estimate (37 cents vs. 38 cents) despite a lower tax rate that added approximately $0.06. Consensus was 39 cents. Recall that Thor previously reported strong revenue growth (+24%) and a healthy backlog (+27%).
Discounting to defend share. Management continues to make the strategic decision to offer incentives to protect dealer lot space and market share. Consequently, margin fell short. RV earnings before taxes (EBT) margin improved 30bp, but fell short of our forecast (4.9% vs. 5.2%). Bus margin also came up short. Management indicated that second-half operating margins would be similar to the second half of 2012 – implying downside to expectations.
Inventory up 18%. RV dealer inventory increased 18% to 61,209 units (towables and motorhomes), consistent with our expectation for a 17% increase. Big picture, we believe dealers are in the early stages of a modest re-stocking cycle after a long de-stocking cycle – and consider inventory balanced in anticipation for a retail recovery. We note that dealer confidence measured by the Baird RV Dealer Sentiment Index is near an all-time high, fueling an appetite for more inventory.
Retail improving, but share eroding. Combined with the 17% increase in shipments, the data imply retail demand improved 3% in the January quarter. In 2012, Thor’s combined share of the towable market (travel trailers and fifth-wheels) fell to 38.1% from 38.6%, according to Statistical Surveys Inc. Motorhome share was flat in 2012 at 20.0%.
Cutting estimates. We cut our F2013 EPS forecast to $2.70 from $2.80 ($2.92 consensus). We model RV retail volume up 8%, with shipments outpacing retail by 9,400 units as Thor offers discounts (margin pressure) to defend lot space. We consider inventory balanced, but should retail fail to meet expectations, dealers may opt to cut orders, putting further pressure on revenue and profits.
Editor’s Note: The investment firm of Robert W. Baird & Co. issued a client newsletter following this week’s release of the quarterly financial results for Thor Industries Inc., a leading RV manufacturer. Excerpts from the Baird newsletter follow.
Solid quarter consistent with Baird outlook. Thor reported solid preliminary sales and a healthy order backlog. Big picture, retail demand continues to improve, driving strong orders from confident dealers. Although inventory is expanding, Baird considers it balanced in light of better retail. At the margin, Baird noted relative strength in motorhomes and intense competitive pressure in towables. Baird remains optimistic about the recovery as negative equity evaporates, but would be selective on valuation.
Revenue upside. Preliminary sales for the January quarter improved 24% to $741 million, just shy of the $748 million forecast but above the $716 million consensus forecast. RV sales improved 27% to $636 million, slightly below Baird’s $648 million estimate.
• Towables. Towable revenue improved 18% to $522 million versus our $518 million estimate.
• Motorhomes. Motorhome sales improved 100% to $114 million versus our $130 million estimate.
• Specialty vehicles. Bus sales improved 10% to $105 million versus our $99 million forecast.
Solid backlog. Total backlog improved 27%, to $822 million, slightly above our $793 million forecast. The RV backlog improved 49% to $617 million, significantly exceeding Baird’s $554 million estimate.
• Towables. The towable backlog improved 25% to $375 million versus Baird’s $415 million estimate.
•Motorhomes. The motorhome backlog jumped +114% to $241 million, well above Baird’s $138 million estimate.
• Specialty vehicles. The bus backlog fell 12% to $205 million, well short of Baird’s $240 million estimate.
Strong early retail. Early RV shows have been promising, consistent with Baird’s view that consumers are spending in key discretionary categories as negative equity evaporates. Thor retail demand improved 7% in towables and 19% in motorhomes during the first month of the January quarter, according to industry data that likely will be revised higher.
Inventory remains top investor concern. Thor has been shipping more product to dealers in hopes of better retail results. Meanwhile, confident dealers are more than willing to oblige (the Baird Dealer Sentiment Index is near a record high). After a long destocking cycle that left the cupboards nearly bare, a recent restocking effect has inventory closer to balanced.
Editor’s Note: The investment firm of Robert W. Baird & Co. issued a client advisory following its fourth quarter survey of 106 RV dealers across the nation. Excerpts from the newsletter follow.
Fundamentals look solid, but OK to harvest gains. In partnership with the Recreation Vehicle Dealers Association (RVDA), we contacted 106 RV dealers to assess recent trends. It’s the off-season, but trends were generally favorable. Fundamentally, consumer demand is improving as negative RV equity evaporates, stimulating trade-in activity. Meanwhile, after an extended destocking period, inventory is lean-to-balanced and dealer confidence is building – supporting strong orders. We remain bullish on fundamentals, but would trim into strength on valuation.
Retail continues to improve. Dealers reported growth in motorhomes (+2-4%) and towables (+12-14%) during the seasonally less-important December quarter. We believe better consumer confidence and improving used RV values are supporting stronger demand. Retail data from Statistical Surveys Inc. (SSI) indicate motorhome demand improved 3% in October, while towable demand increased 8%.
Sentiment soaring. Dealer sentiment remains quite strong. Dealers that survived the recession by slashing inventory and running a lean cost structure see potential for better days as retail recovers. Improved sentiment is driving incremental wholesale demand, fueling the early stages a re-stocking effect in which wholesale shipments exceed retail sales. The trend could persist for a while, in our view.
Inventory appears lean to balanced. Dealers report 125 days of towable inventory (up from 121 days last year) and 88 days of motorhome inventory (down from 118). As dealer sentiment rises, dealers have become more confident stocking in anticipation of better demand. Still, it’s the offseason for many dealers – the percentage of dealers expressing concern about the level of inventory increased.
Outlook. We are bullish on RV fundamentals as demand improves. We believe improving values in big-ticket items may reinflate a wealth effect for more consumers. Meanwhile, dealer inventory appears lean to balanced, supporting a modest re-stocking effect before a bubble builds.
Editor’s Note: The investment firm of Robert W. Baird & Co. distributed an analysis of the leisure market to investors. Highlights of that note follow.
We hold an optimistic consumer discretionary outlook as demand improves in the context of lean channel inventory. We believe improving values in big ticket items (RVs, boats,motorcycles, houses) may re-inflate a wealth effect for more consumers. Meanwhile, dealer inventory appears lean-to-balanced, supporting a modest re-stocking effect before a bubble builds. Longer-term, we are concerned that deficit spending and tax policy will lead to recession – but a wealth effect and restocking-effect suggest trends will get better before they get worse.
• Tectonic pressure on the economic fault line. Massive pressure is building on both sides of the economic fault line. On the bullish side, a housing recovery, low interest rates, and open-ended quantitative easing are re-inflating a wealth effect that should drive new spending. On the bearish side, the fiscal cliff, deficit spending, and tax policy on discretionary wealth are fueling a growth/debt crisis that eventually will lead to a recession, in our view. Although we see risk building, we believe that consumer footing is firming – supporting our optimistic outlook for 2013. We stress that channel inventory is lean-to-balanced, alleviating the risk of a demand shock. At the margin, we favor ideas with a compelling product cycle (PII) or turnaround agenda (HOG, BC) to purely cyclical ideas.
We emphasize three cycles to assess consumer discretionary fundamentals: spending, inventory, and product.
• Spending cycle. We see a better housing market as the mother of all catalysts, washing away the prime source of negative equity on most consumer balance sheets. Fed policy specifically targets the housing market, and it may not quit until it succeeds (damn the consequences). Meanwhile, we monitor pockets of equity accumulating in product categories, from boats to motorcycles, and believe the tide rising in some markets.
• Inventory cycle. Our checks indicate dealer inventory remains lean-to-balanced. After an extended destocking period, dealer inventory is fresh and turning quickly. As confidence builds, dealers have an appetite for more inventory. Before inventory becomes bloated, we expect a restocking effect to play out, in which more is shipped into the channel than is sold. It can take years to build an inventory bubble, but 2013 may be the year it starts to inflate.
• Product cycle. Economic cycles matter less for innovative companies that create their own product cycles.
Bottom-up Approach. Our coverage process emphasizes bottom-up research and proprietary channel checks. We capture insight from industry sources and local dealers to monitor retail trends, inventory levels, order plans, credit availability, and business sentiment. Recently, these our checks indicate better retail, lean inventory, and improving dealer sentiment – supporting our broadly optimistic outlook.
RV Dealer Survey. We contact over 100 RV dealers every quarter and host an annual field trip to meet with industry contacts. The end-of-quarter survey, our longest-running dealer survey, gives us an excellent read on traffic, retail, inventory, credit, and sentiment. Today, dealers are gaining confidence as retail improves, stimulating orders to build inventory after a long de-stocking period.
Editor’s Note: Following this week’s release of the wholesale RV shipments report from the Recreation Vehicle Industry Association (RVIA), the investment firm of Robert W. Baird & Co. distributed a routine advisory note to its investors. Highlights of that note follow.
October RV shipments up 31%. Wholesale shipments improved 31% on strong growth across all categories. Key categories drove the robust growth, with both motorhome (Class A and C) and towable (travel trailer and fifth-wheel) shipments growing 32% in the month. The growth is consistent with elevated dealer sentiment and reportedly strong orders out of the Elkhart open house. Class A and C shipments are now up 8% YTD, and travel trailer and fifth-wheel shipments have grown 14% YTD.
Towable (TT and 5W) shipments up 32%. Travel trailer shipments grew 33%, while fifth-wheel shipments jumped 29%. The strong October growth followed robust shipments in July (+30%), August (+15%), and September (+13%). Combined, travel trailer and fifth-wheel shipments were up 14% YTD.
Motorhome (A and C) shipments grew 32%. Robust motorhome growth continued for the fourth consecutive month as Class A shipments grew 26% while Class C shipments jumped 43%. Class A and C shipments are now up 8% YTD.
Thor. October marks the third month of Thor’s fiscal 1Q13. Thor reported quarterly results on Nov. 26 — towable shipments increased 27% and motorhome shipments jumped 78%.
Winnebago. October marks the second month of Winnebago’s fiscal 1Q13. The October industry growth in motorhomes (A and C; +32%) compares favorably to our +24% expectation for Winnebago shipments.
RVIA updates shipment forecast. RVIA released its updated RV shipment forecast in conjunction with the Association’s annual National RV Trade Show. RV shipments are projected to have increased nearly 10% by the end of 2012, and 2013 shipments are projected to grow 4.5% to nearly 290K units.
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The 50th Anniversary National RV Show is barely underway and industry observers are already forecasting a bullish outlook for the industry.
Officials with Robert W. Baird & Co. are hosting a field trip to the trade show this week in Louisville, Ky., including meetings with Thor Industries Inc., Winnebago Industries Inc., Drew Industries Inc., Bank of America, Ally Bank and the Recreation Vehicle Dealers Association (RVDA).
“We expect a bullish tone driven by optimistic dealers and strong orders, underpinned by budding signs of a housing recovery,” Baird stated in a note to investors. “We will be interested to monitor retail trends, dealer sentiment, inventory, orders and margin pressure – along with the impact of macro drivers like housing, the fiscal cliff, and tax policy on discretionary wealth (including talk of changes to the mortgage interest deduction which current benefits RV buyers).”
This positive outlook comes the same day that the Recreation Vehicle Industry Association (RVIA) released its 2013 forecast, forecasting wholesale shipments will rise 4.5% in the coming year.
Baird noted the recent first quarter financial results released on Monday by Thor Industries Inc. leads the industry upturn. Highlights of that report follow:
Optimistic dealers drive solid quarter. After posting impressive preliminary sales and a robust backlog Nov. 5, Thor reported on Monday a modest EPS shortfall due to discounting and one-time items. Dealers are confident, supporting a healthy backlog and inventory growth. “We remain optimistic as negative equity evaporates (housing), but would be selective on valuation – especially as inventory grows. Industry fundamentals continue to improve, but with tax policy up for grabs and dealer inventory back in balance, we prefer to pick our spots.”
EPS shortfall. Thor reported a modest EPS shortfall ($0.58 vs. $0.61) due to one-time items ($0.63 consensus). As a reminder, Thor previously reported robust revenue growth (+30%) and a strong backlog (+41%) – driving investor enthusiasm for the stock. A legal settlement and severance costs reduced EPS by $0.02, although Thor generally emphasizes GAAP (not pro forma) EPS.
Discounting persists. Management twice referred to elevated discounting, suggesting the environment has not improved. As the industry shifts the order cycle from November (RVIA show) to September (Elkhart show), manufacturers make every effort to book business early. Again this year, Thor offered to cover floorplan costs for Elkhart orders – but only for orders placed at the show.
Dealer optimism drives inventory growth. Dealer inventory in Thor products increased 14% as dealers bet on a recovery. After a long destocking period, management characterized inventory levels as “appropriate.” Meanwhile, recent checks and strong OEM backlogs indicate a confident dealer base. The Baird RV Dealer Sentiment Index hit 68 in October (100 point scale), the second-highest reading since we began tracking the metric in 2006. Meanwhile, Thor reported a 73% jump in the RV backlog earlier this month.