Thor Industries (NYSE: THO) has a huge backlog, which would normally be a good sign for the company. Producing recreational vehicles (RVs) is expensive and it helps to have contract orders on hand that represent consumer interest, even if those contracts are not binding.
But above a certain level, the backlog reflects manufacturing challenges and inventory risk. This is one of the main reasons why Thor’s management has highlighted its downsizing as a top priority heading into the summer months. Let’s take a closer look at this goal, which was set out in Thor’s recent earnings announcement.
Sales and profit trends
The main operating parameters were all solid. Thor reported a 35% increase in sales, marking just a slight slowdown from the previous quarter’s peak of 42%. Its European division has shrunk, but that decline has been more than offset by growing demand in the US market for towable and motorized RVs.
The earnings picture was also bright, with the gross profit margin improving to 17% of sales from 14% a year ago. Thor has no trouble passing the higher costs on to RV buyers today. “We achieved another quarter of record revenue and net profit,” Chief Financial Officer Colleen Zuhl said in a press release.
It wasn’t all good news in the report, however. Thor said he’s currently seeing slower growth in the US industry, implying weaker demand ahead. The towable recreational vehicle segment may begin to decline soon after several years of meteoric growth.
Management also hinted at a decline in profit margin ahead as boom times return to more normal growth patterns. To be clear, Thor is predicting one of the best years in VR industry history in 2022, with solid earnings and sales growth on the way.
Still, executives note that sales trends are slowing and operating margin could land at 16% of sales from the 17.3% rate it recently reached.
This slowdown helps explain why Thor is working hard to turn his backlog into actual customer sales. This metric now stands at nearly $14 billion, a high level, according to management.
Reducing the backlog involves increasing production and keeping the supply chain as efficient as possible. Thor is practiced in challenges like these, which means investors should see progress on these goals over the next few quarters.
In addition to a shrinking backlog, shareholders should expect slower sales gains and lower profit margins through much of 2022. Revenues and earnings are expected to set further records and reflect very strong trends in RV demand.
In the meantime, investors will get another major industry update when its rival winnebago (NYSE: WGO) announces its results for the third fiscal quarter at the end of June. Winnebago noted a strong backlog and strong demand for RVs in its latest earnings update in March. Executives said at the time that they were looking to reduce the backlog while increasing inventory levels at dealerships.
While Winnebago and Thor have been charting strong demand and earnings trends lately, their shares have been declining. Wall Street never likes to see operating metrics move in the wrong direction, even after several years of skyrocketing gains.
But the main concern right now is how well Thor and Winnebago can capitalize on pending orders while avoiding an oversupply situation in the event of an economic downturn or recession.
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Demitri Kalogeropoulos has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.
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