Thor Industries (THO 56.60, -7.71, -11.99%) is under pressure this morning after
reporting disappointing 1Q19 (Oct) earnings results. It's a tough environment
right now for the RV industry as rising interest rates have dampened sales and
tariffs have caused raw material (steel, aluminum) prices to increase. In addition,
companies like Thor are lapping some tough comparisons in the prior year
Thor is one of the world's largest manufacturers of recreational vehicles (RVs). There are two major types of RVs: towables (non-motorized) and motorized. For Thor, it has much higher exposure to the towables segment of the market as about 72% of its FY18 revenue came from towables and 26% comes from motorized. THO owns a number of brands. Some of its larger brands include: Airstream, which makes premium quality travel trailers and motorhomes. Another major brand is Jayco which was acquired in July 2016. Thor also owns CrossRoads, which makes conventional travel trailers and fifth wheels.
In September 2018, Thor announced a major acquisition when it said it will acquire Erwin Hymer Group (EHG), a privately held Germany-based RV supplier, for an enterprise value of approximately €2.1 bln in cash and stock. The combination creates the world's largest RV manufacturer, with the leading position in both North America and Europe. EHG's product portfolio spans all major RV categories and price points, from lightweight travel trailers to high-end motorhomes.
Turning to the OctQ results, the company was profitable but revenue fell 21.3% yr/yr to $1.76 bln, which was well below market expectations. Towable RV sales were $1.28 bln, down 21.0% yr/yr, driven primarily by lower unit volume and increased levels of discounting further reducing sales, which was partially offset by a mix shift toward higher-priced units. Motorized RV sales were $431.2 mln, down 23.9% yr/yr, driven primarily by lower unit sales, partially offset by a mix shift toward higher priced product.
So, what is going on? One problem is that dealer inventories are too high. During the quarter, Thor increased its promotional efforts to assist dealers in reducing inventory to better reflect current retail demand levels. Also, Thor has been cutting back production to match demand. Following inventory constraints in 2017, Thor increased capacity in 2018 to alleviate the pressures of longer production lead times and meet demand. However, Thor has been pulling back on production rates.
Margins took a hit in OctQ as gross margin declined to 11.8% from 14.9% in the prior-year period, reflecting the impact of higher overall sales promotions and increased costs from warranty expenses. Material costs also increased as a result of, directly or indirectly, the implementation of tariffs on many commodities and components used in the production of Thor's products, as well as increased pricing from some domestic suppliers in response to the tariffs.
Thor had some positive comments. It said that its underlying markets remain healthy as consumer confidence is high, unemployment is low, and there is ample access to credit for RV buyers. Furthermore, Q1 (Oct) results mostly reflect the return to normalized historical levels of OctQ revenue following the unprecedented record OctQ last year.
Looking ahead, Thor says it remains focused on the long term and is optimistic about its growth opportunities. The combination of retail trends in the RV industry, an influx of new consumers entering the industry and the consistent growth in demand for outdoor experiences should provide a good environment for Thor Industries.
In sum, it's a tough environment right now for RV companies like Thor. Demand has pulled back from what was a huge year in FY18. Part of this is due to higher interest rates. These are large purchases and most people need to finance them so as rates rise, consumers are less willing to purchase. Also, on the cost side, the tariffs have led to higher steel aluminum prices for Thor. All of this has led the stock to fall from $160 in January 2018 to around $57 currently. Despite the issues, RV stocks can be big movers on the upside when conditions are positive. At some point, value buyers will go looking for deals and wait out the next upcycle, which is not a bad idea.
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