Winnebago’s Backlog Remains High due to Demand Resetting Higher After the Pandemic

Business Strategy & Outlook:

Winnebago, which reinvented itself under CEO Mike Happe with the November 2016 acquisition of high-end towable maker Grand Design, sees itself as a leading outdoor lifestyle firm. It now has a marine segment with Chris-Craft and Barletta. Towable is an area the company had long wanted to grow in but had remained very small since acquiring SunnyBrook in 2011. Winnebago’s North American towable share is 12%, up from under 2% before Grand Design, so a long growth runway is forecasted if it can keep chipping into Thor’s and Forest River’s roughly 80% combined share. In fiscal 2021, towable were about 55% of total revenue compared with just 9% in fiscal 2016. High brand equity enabling scale and barriers to entry provide Winnebago with a narrow economic moat.

Leadership sees opportunities to improve Winnebago’s operations with an intense focus on strategic planning to be faster to market with new products in new segments such as off-roading and lower price points (but not the cheapest in a segment). Models are no longer cloned, which should help dealer profitability, and product will be positioned around a good, better, best framework. A unit is now not manufactured until it has an order, which should mean little to no discounting. Acquisitions in the $700 billion-plus outdoor activity market also play a role, but only for high-end firms such as Grand Design, Chris-Craft, Newmar, and Barletta. Industry data shows that 11.2 million U.S. households owned a RV in 2020, up from 6.9 million in 2001. 60% of first-time campers are under age 40 and have a household income of $100,000 or more versus 29% for all campers. 82% of new campers since the pandemic have children and Hispanic and Black consumers were 25% of all campers in 2020, up from 8% in 2012, so Winnebago has plenty of runway with a wide consumer base if it executes right. Winnebago’s brand equity gives it a good shot at capitalizing on these trends. The pandemic-induced outdoor lifestyle boom has also given the company a $3.6 billion RV backlog at third quarter fiscal 2022, up from about $400 million at the end of fiscal 2019.

Financial Strengths:

The balance sheet lacks the massive legacy costs that burden some other manufacturers because Winnebago’s workforce is not unionized. Winnebago’s untapped $192.5 million credit line, good through Oct. 22, 2024, coupled with about $238 million of cash should, get the firm through nearly any challenge. A 9% increase in the dividend in summer 2020, despite the pandemic at the time, is a good sign of financial health, as is a 50% increase announced in August 2021. Winnebago’s balance sheet had been free of long-term debt since the mid-1990s. Having no debt limits the downside to equity investors, but new leadership was exploring whether to add debt and did so in fiscal 2017 with $353 million to fund part of the consideration to buy Grand Design. Debt as of May 28 totaled $600 million, before a $49.1 million convertible note discount and $9.4 million of debt issuance costs, and consists of $300 million of 1.5% 2025 unsecured senior convertible notes issued to buy Newmar (along with the company issuing 2 million shares of stock to the seller at $46.29) and $300 million of 2028 6.25% senior secured bonds. The convertible notes are not callable, can be converted any time starting Oct. 1, 2024, and have a conversion price of $63.73 per share. The target range for net debt/adjusted EBITDA is 0.9-1.5 times, but management is willing to leverage up to 3.0 times to make an acquisition. Net debt/adjusted EBITDA was 0.6 times at the end of third quarter fiscal 2022. Winnebago has no significant pension obligations and stopped paying retiree healthcare in 2017. Winnebago expects to be comfortably free cash flow positive in the long term. Company would prefer that it repurchase its shares only when they’re cheap and buybacks be done at a minimum to offset dilution from stock option issuance. Acquisitions and other growth investments are a priority over buybacks.

Bulls Say:

The Grand Design acquisition materially raised Winnebago’s operating margin, and Newmar could do the same.
The company’s strong balance sheet provides financial strength and flexibility to withstand cyclical downturns.
Because RV consumers are relatively affluent, rising gas prices would probably not hinder a consumer’s ability to purchase a motor home. A 2016 study by travel consulting firm PKF Consulting found that for a family of four, gas prices would have to exceed $12 a gallon to make RV travel more expensive than other forms of travel.

Company Description:

Winnebago Industries manufactures Class A, B, and C motor homes along with towable, customized specialty vehicles, boats, and parts. Headquartered in Eden Prairie, Minnesota, Winnebago has been producing recreational vehicles since 1958. Revenue was about $3.6 billion in fiscal 2021. Winnebago expanded into towable in 2011 with the acquisition of SunnyBrook and acquired Grand Design in November 2016. Towable made up 85% of the firm’s RV unit volume, up from 31% in fiscal 2016. The company’s total RV unit volume was 71,015 in fiscal 2021. Winnebago expanded into boating in 2018 with the purchase of Chris-Craft, bought premium motor home maker Newmar in November 2019, and bought Barletta pontoon boats in August 2021.

(Source: Morningstar)

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