The COVID-19 pandemic significantly changed consumer behavior, particularly in the recreational vehicles (RVs) industry. In the early days of the pandemic, extra cash that found its way into Americans’ bank accounts due to federal government largess and a desire for social distancing drove a surge in sales of RVs, boats, motorcycles, and snowmobiles, propelling them to multi-year records.
However, this initial bubble during the pandemic for RVs—along with boats, motorcycles, and other outdoor vehicles—has burst, leading to a significant market correction as demand normalizes and financial conditions tighten. As the cost of living increased, remote working became more challenging, and interest rates surged, financing for these big-ticket items grew prohibitively expensive.
According to the RV Industry Association, RV shipments witnessed a nearly 40{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} increase from 2020 to 2021. The RV industry shipped a record of about 600,240 units to dealers in 2021, up 19{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} from the record set in 2017. RV shipments nosedived post the pandemic surge. The RV industry ended 2023 with 313,174 shipments, down 36.5{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} compared to 2022.
“The pandemic did spark a lot more of buying action from the consumer but now it’s coming back to more of the 2018, 2019 numbers, rather than the crazy numbers in 2020 through 2022,” said co-owner and general manager of Midway, Chris Grant.
As the pandemic bubble has burst, investors could consider selling off recreational stocks such as Thor Industries, Inc. (THO), Winnebago Industries, Inc. (WGO), and Polaris Inc. (PII). Let’s delve deeper into the stocks’ fundamentals and near-term outlook.
Thor Industries, Inc. (THO)
Thor Industries, Inc. (THO), a leading manufacturer of RVs, experienced a tremendous surge in demand during the pandemic but now faces a market correction. The stock has struggled to maintain its pandemic-era gains, with consumers pulling back on discretionary spending and higher financing costs dampening enthusiasm for RV purchases.
Shares of THO have plunged more than 8{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} over the past month and approximately 10{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} over the past six months.
THO’s trailing-12-month gross profit margin of 14.10{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} is 61.7{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} lower than the 36.80{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} industry average. Likewise, the stock’s trailing-12-month EBIT margin and net income margin of 4.28{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 2.59{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} unfavorably compare to the industry averages of 7.59{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 4.70{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}, respectively.
“In our fiscal third quarter, our independent dealers experienced increased retail activity during the Spring selling season; however, conversion to sales remained difficult in light of the economic pressures on retail buyers. Faced with elevated floor plan interest rates, our independent dealers remain understandably cautious with their ordering patterns; consequently, our independent dealer inventory levels remain suppressed,” said Bob Martin, President and CEO of THOR Industries.
“Given the macroeconomic conditions, we see this cautious approach as healthy for our industry and maintain our confidence in a robust return of our top and bottom line performance once macro pressures subside,” Martin added.
For the quarter that ended April 30, 2024, THO’s net sales decreased 4.4{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year to $2.80 billion. North American Toward RV net sales were down 4.7{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}. Its gross profit came in at $421.85 million, down 2.5{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} from the year-ago value. Its net income and earnings per common share were $113.58 million and $2.13, declines of 5.1{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 4.9{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year, respectively.
As of April 30, 2024, the company’s cash and equivalents stood at $371.82 million, compared to $441.23 million as of July 31, 2023. THO’s current liabilities increased to $1.74 billion at the end of the third quarter.
Given the challenging market conditions, the company lowered its full-year 2024 guidance. The prolonged market downturn, which persisted longer than anticipated, continues to impact THO’s independent dealers and consumers, which the company believes will constrain its top and bottom lines for the fourth quarter.
Based on current North American order intake levels through the end of May, the company revised its guidance ranges to reflect a more conservative fiscal year 2024 North American industry wholesale shipment range of 315,000 to 325,000 units, down from the prior range of 330,000 to 340,000 units.
For the full year, THOR Industries expects consolidated net sales in the range of $9.8 billion to $10.1 billion, compared to the previous guidance of $10.0 billion to $10.5 billion. Its gross profit margin is expected to be 13.75{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}-14{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}, down from previously guided 14{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}-14.5{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}. Also, the company’s earnings per share are anticipated to range from $4.50 to $4.75 (previously $5-$5.50).
Analysts also appear highly bearish about the company’s prospects. Street expects THO’s revenue and EPS for the fiscal year (ending July 2024) to decrease 10{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 32.4{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year to $10.01 billion and $4.70, respectively.
Winnebago Industries, Inc. (WGO)
c, another prominent player in the RV market, has faced headwinds as demand wanes. The company enjoyed a boom during the height of the pandemic, but the current economic uncertainty and rising interest rates have led to decreased sales and stock performance.
WGO’s stock has slumped nearly 15{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} over the past six months and more than 19{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-to-date.
After all, WGO’s trailing-12-month gross profit margin and EBITDA margin of 15.93{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 8.59{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} are lower than the respective industry averages of 36.80{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 11.18{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}. Similarly, the stock’s trailing-12-month net income margin of 3.70{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} is 21.4{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} lower than the industry average of 4.70{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}.
In the second quarter that ended February 24, 2024, WGO’s net revenues declined 18.8{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year to $703.60 million, driven by lower unit sales related to market conditions and unfavorable product mix. Its gross profit decreased 28.3{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year to $105.30 million. Its operating income was $35.40 million, down 53.9{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} from the previous year’s quarter.
Furthermore, the company reported a net loss of $12.70 million, or $0.43 per common share, compared to a net income of $52.80 million, or $1.52 per common share, respectively. Its adjusted EBITDA decreased 83.7{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} from the year-ago value to $13.90 million.
During the quarter, wholesale shipments were constrained as dealers closely managed inventory levels amid a high interest rate environment and seasonal demand trends. As of February 24, 2024, the backlog from the Motorhome RV segment was $452.20 million (2,582 units), down 48.2{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} from the prior year.
As of February 24, 2024, the company’s total outstanding debt was $694.80 million. Winnebago Industries completed a $350 million offering of convertible senior notes for refinancing 2025 maturities in the second quarter. Its cash and cash equivalents were reduced to $265.70 million, compared to $309.90 as of August 26, 2023.
Analysts expect WGO’s revenue for the third quarter (ended May 2024) to decrease 10.6{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year to $805.49 million. The consensus EPS estimate of $1.34 for the same quarter reflects a 36.9{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year decline. Additionally, the company missed consensus revenue estimates in three of the trailing four quarters, which is disappointing.
For the fiscal year ending August 2024, the company’s revenue and EPS are expected to decline 10.1{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 35.2{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year to $3.14 billion and $4.97, respectively.
Polaris Inc. (PII)
Polaris Inc. (PII), known for its motorcycles, snowmobiles, and other recreational vehicles, has also felt the pinch. PII’s stock soared as consumers sought outdoor activities during lockdowns. However, the subsequent economic shifts have cooled demand, leading to a decline in stock value. Shares of PII have declined more than 18{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-to-date and around 35{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} over the past year.
PII’s trailing-12-month gross profit margin of 22.23{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} is 39.6{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} lower than the 36.80{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} industry average. Likewise, the stock’s trailing-12-month EBITDA margin and levered FCF margin of 9.78{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 3.72{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} are lower than the industry averages of 11.18{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 5.46{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38}, respectively.
PII’s sales decreased 20{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year to $1.74 billion for the first quarter ended April 23, 2024. The company’s sales were negatively impacted by lower volume and net pricing driven by higher promotional activity partially offset by a favorable product mix. North America sales were down 22{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year. Its adjusted gross profit margin declined 29.5{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} from the year-ago value to $330.70 million.
In addition, adjusted net income and adjusted EPS attributable to PII were $13 million and $0.23, down 89.1{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 88.8{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year, respectively. Its adjusted EBITDA declined 53.8{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} from the prior year’s period to $110 million. Also, the company’s free cash flow came in at a negative $162.10 million, compared to $35.10 million in the previous year’s quarter.
According to the 2024 business outlook, Polaris expects full-year sales to be down 5 to 7{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} compared to fiscal 2023. The company anticipates adjusted EPS attributed to Polaris Inc. common shareholders down 10 to 15{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} versus 2023.
Street expects PII’s revenue and EPS for the second quarter (ending June 2024) to decrease 2.3{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 6.3{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} year-over-year to $2.17 billion and $2.27, respectively. Further, the company’s revenue and EPS for the fiscal year 2024 are expected to decline 6.2{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} and 13.7{3da602ca2e5ba97d747a870ebcce8c95d74f6ad8c291505a4dfd45401c18df38} from the prior year to $8.38 billion and $7.90, respectively.
Bottom Line
Companies primarily operating in the RV industry face ongoing macroeconomic challenges. While the RV and boat market experienced an unprecedented boom during the COVID-19 pandemic, the subsequent decline in consumer demand and economic factors like higher interest rates and inflation have created a challenging environment for these stocks.
Despite this downturn, some companies, including Brunswick Corporation (BC), managed to navigate these choppy waters. However, other companies, including Thor Industries, Winnebago, and Polaris, have not fared as well. Investors should carefully assess their positions in these companies and consider the potential benefits of reallocating their portfolios in response to the changing market dynamics.
Thus, it seems prudent to consider selling struggling recreational stocks THO, WGO, and PII, which have lost their massive pandemic-era gains.
